January 2025 Labor Market Review: The Talent Shortage Persists

The U.S. labor market was remarkably resilient in 2024—and the most recent data suggests that this strength will persist in 2025. Competition for labor should remain robust, and the average employer should expect recruiting and retention challenges to remain a significant obstacle, although the scope and scale of these obstacles will vary significantly depending on the organization’s skills needs and industry. 

With the unemployed-to-job-openings ratio remaining under 1 at 0.9, the labor shortage continues to dominate recruitment conversations. For HR leaders, this means doubling down on retention strategies to secure your existing workforce. Evaluate engagement initiatives, career paths, and flexible work options to keep employees from exploring greener pastures. 

While wage growth has slowed significantly from its pandemic-era peak, it remains relatively strong at 3.9% year-over-year. HR leaders will need to continue to assess their compensation strategies while examining nonmonetary benefits, such as career development, to attract and retain top talent.

Let’s dive deeper into the numbers to see what the latest jobs data says about the current state of the labor market.

Employment Growth Rockets Past Analysts’ Expectations

Total nonfarm employment increased by 256,000 jobs in December 2024, according to the latest U.S. Bureau of Labor Statistics (BLS) report, significantly exceeding analysts’ expectations. This report caps off a year in which the U.S. labor market (and broader U.S. economy) continued to demonstrate remarkable resilience in the face of comparatively weak and volatile global economic conditions. Between January and December 2024, total nonfarm employment increased by an average of 186,000 jobs per month. While this is down sharply from the overheated pandemic period, the labor market remains tight by historical standards.

This chart plots the monthly change in total nonfarm employment between January 2023 and December 2024, as well as the 12-month average monthly change during the same period.

Most major sectors saw a rise in employment in December 2024, but the growth was not evenly distributed. Employment in health care/social assistance grew by nearly 70,000 jobs in December, bringing the sector’s total employment gains for the year to just over 900,000 jobs. Other sectors experiencing strong growth included retail trade, accommodation and food services, and government, though some of these gains (especially in retail trade) reflected short-run growth stemming from hiring related to the holiday season. Meanwhile, employment fell in four major sectors, including 16,000 jobs lost in durable goods manufacturing.

This chart shows changes in major industries’ total employment figures between November and December 2024. 

Labor Underutilization Falls Slightly

Labor underutilization rates have been rising slowly over the last two years; however, they began that climb from historically low levels, so this increase has been seen by many as a slow return to normal conditions. As of December 2024, both rates are indicative of a healthy labor market with a relatively low and stable level of labor underutilization.

This chart plots two different measures of labor underutilization, along with their five-year averages. The U3 rate, which is the official unemployment rate, tracks the share of labor force participants who are jobless but able to work and actively seeking employment. The U6 rate uses a broader concept of labor underutilization by including people marginally attached to the workforce and people working part-time for economic reasons (in addition to the set of unemployed people captured in the U3 rate).

Wage Growth Ticks Down but Remains Elevated

Inflation has been the most frequently discussed economic topic in recent years, and wage inflation has challenged employers. After falling from a high of 5.9% in March 2022 to 3.6% in July 2024, year-over-year wage growth ticked back up to 4% in October and November 2024. As of December 2024, year-over-year average hourly wage growth for private-sector workers sat at 3.9%. This is still somewhat elevated by recent historical standards, partly because the Great Recession suppressed wages for an extended period. In any case, this strong growth rate can largely be attributed to the excellent overall health of the U.S. economy, as well as a persistent labor shortage.

The chart above plots year-over-year growth in average hourly earnings for all private-sector employees during the most recent 24-month period, as well as the five-year average of this growth rate. 

Overall Labor Shortage Persists Heading into 2025

The unemployed-people-per-job-opening ratio (UJOR) value remained at 0.9 as of November 2024, a level it has stayed at for several months in a row. Although often framed as a direct byproduct of the pandemic, the current labor shortage actually stems from a multitude of factors. One major issue is that the broader U.S. economy remains strong, which tends to keep demand for workers high. Another, longer-term issue is population aging, which has constrained growth in the working-age population for years. In fact, this slowdown in labor supply growth is a central reason that, outside of the first year of the pandemic, there have been more job openings than unemployed people in the U.S. labor market since March 2018.

This chart plots the UJOR, which is the ratio of the unemployed population (i.e., people without a job who are able to work and actively looking for employment) to the number of open jobs at a given point in time. When the value of this ratio is below 1, it means that even if every unemployed person could be immediately matched to an open job, there would still be unfilled positions at the end of this matching process. These conditions necessarily indicate a labor shortage in the overall labor market, though it is worth noting that other labor market frictions (e.g., skills mismatches between job seekers and open positions) can create a labor shortage even when the UJOR is above 1.

What Do These Findings Mean for You?

The labor market remains strong as 2025 gets underway, and the labor shortage persists. One clear implication of these facts is that challenges associated with attracting and retaining talent are likely to remain top-of-mind for many organizations. From a policy point of view, continued evidence of a robust labor market suggests that the Federal Reserve may adopt a cautious approach to lowering interest rates in 2025, though these decisions will be based on a broader set of economic indicators.