The Labor Market’s Defiant Stability

The world economy is in a place of lurching uncertainty with soaring energy costs, a race for artificial intelligence dominance, and a global trade order that is trying to reconstruct itself. None of this has disturbed the remarkably stable U.S. labor market.

The U.S. Economic Policy Uncertainty Index, reached 724.9 in April 2025, the highest reading in records going back to 1980, driven by sweeping tariff increases and the onset of the Iran war. The index averaged 350 in the first four months of 2026, the highest sustained level since the 2020 COVID-19 shock apart from the surge in 2025.

The central puzzle for economists is why the economy and the labor market have remained so stable in the face of shocks of this magnitude.

Real final sales to domestic purchasers, a measure of demand without volatile inventory and export components, is growing in a range of 2.8% to 2.5% year-over-year in the five quarters starting 2025. Unemployment remains steady at 4.3%, and non-farm payrolls rose by about 115,000 last month. Layoffs have not jumped, and quit rates are around normal levels.

By the standards of the last 50 years, this is a genuine economic puzzle. In this blog, we are going to look at some historical patterns in the labor market when shocks hit and look at what is happening now.

Decoupling from History

Most historical research focuses on business cycles where policy uncertainty and economic deterioration arrive as a package deal. During the Volcker disinflation, the Gulf War, the Lehman collapse, and COVID-19, the spike in uncertainty arrived alongside shocks to demand or supply.

Companies reduce headcount, raising uncertainty for workers as well, as demand falters. Labor market dynamism also slows. Quit rates stall, and layoff rates pick up. Workers quit when they feel confident about finding better opportunities; they stay put when they do not.

A falling quit rate can be the first sign that caution is spreading, usually acting as a leading indicator before unemployment even begins to rise. Layoffs then arrive to confirm that the slowdown is no longer just psychological.

Decades of historical data — spanning thousands of household surveys since the late 1970s — document a durable rule: quits and layoffs move in opposite directions, with a correlation of roughly –0.46. Lately, the quit rate has been stable, averaging 2% since January 2025. Even with some big job cut announcements from tech companies such as Block, Meta, and Amazon, the layoff rate has also been stable.

Economists Kathrin Ellieroth and Amanda Michaud formally documented the quit-layoff relationship during recessions. What we do here is overlay uncertainty in their analysis and test whether the pattern holds in today’s environment.

A Stark Anomaly

The quit rate barely budged in 2025 when the U.S. monthly EPU index peaked near 725. The layoff rate continued to run below its pre-2020 historical average. Despite another sharp rise in the EPU this year, the pattern of stable quits and layoffs hasn’t changed. The anomaly is stark. We offer some possible explanations:

Sectoral Isolation: Tariff uncertainty lands first on manufacturers, importers, and large multinationals. It may have less immediate effect on hospitals, restaurants, and software firms. National data can look calm even while pressure builds in narrower parts of the economy. Manufacturers, for example, shed jobs every month in 2025, continuing a long-term secular decline.

Behavioral Fatigue: Businesses and workers may have become skilled at ignoring “Washington noise.” After years of abrupt announcements and reversals, they may assume that some shocks will fade before they become binding. Notably, other cyclical risk measures — equity volatility and corporate credit spreads — have also remained subdued, suggesting financial markets are not pricing in a recession either.

Symmetric Uncertainty: While headlines may be negative, markets and businesses may be better at estimating the full range of outcomes, some of which may be positive such as more secure energy transportation in the Middle East over the long-term.

Sectoral composition: The modern U.S. labor market is dominated by services, not goods production. That matters. Today’s service‑sector employers — health care, education, leisure, professional services — tend to adjust more slowly and rely more on vacancies than layoffs.

Health care represents one of the largest employment shares in the economy with a quit rate that is materially lower than retail and hospitality, while also exhibiting exceptionally low layoffs. As its employment footprint grows, this moderates aggregate turnover and might explain why unemployment remains low even amid elevated uncertainty.

The Bottom Line