Living in a labor market purgatory

May 29, 2026

Payroll employment is expected to rise by 110,000 jobs in May. All of those gains are expected to come from the private sector, with the public sector (federal, state and local) holding steady for the month. 

The monthly gains are probably a bit overstated by the existing “birth and death” models for new establishments. The creation of new firms slowed considerably last year, especially among firms that intend to hire new workers. Some of that over-estimation is why we saw such large downward revisions to the data for payrolls in 2025. The birth rate of new firms tends to slow as the expansion ages and the economy weakens. 

Separately, we have seen a slowdown in startups which have an intent to hire. However, work by Ernie Tedeschi of Stripe reveals that we have seen a new phenomenon in a world with AI. That is a rise in the number of what he termed “solo-premiers” – entrepreneurs who do not plan to hire. These sole proprietor business owners show up not in payroll employment but as employed in the household survey, which focuses on people instead of employers. 

Payroll employment gains are expected to remain dominated by a jump in healthcare and social assistance. Aging demographics are buoying spending on healthcare. The April data for personal income and expenditures show Medicare outlays continued to rise. However, Medicaid outlays fell as some states tightened their requirements for recipients. That is in addition to a drop in use of the Affordable Care Act when subsidies lapsed at the start of the year. Those changes will push more people to use emergency rooms, which adds to costs for nonprofit healthcare systems.  

Transportation and warehousing is expected to post another strong gain. The trucking industry is showing signs of life after contracting for more than three years. Some of that represents consolidation in the industry. The rest represents a pickup in demand due to the boom in data center construction. The “turn down” rate among truck drivers, which is a measure of pricing power, remained elevated in recent weeks. That is despite the higher cost of fuel, which is raising shipping costs. It suggests that the trucking industry has consolidated enough against a rise in demand that it can more easily pass along higher costs, including the surge in diesel fuel prices.

We could see some increases in hiring due to the World Cup, which starts in June. Host cities report hotel room bookings for short-term rentals picking up going into summer. That shows up in leisure and hospitality, as we saw last month and in temporary staffing jobs as the events get closer. 

Average hourly earnings are expected to rise 0.3%, which will cool the rise in annual pay to 3.4%. That would match the annual pace in March and is only 0.1% above the pre-pandemic norm of 3.3%. That is well below the more than 4.2% increase predicted for the consumer price index by the Federal Reserve Bank of Cleveland. Hours worked are expected to edge back down a tick to 34.2 from 34.3 in April.

We expect the unemployment rate to hold at 4.3% in May, buoyed by a slight increase in labor force participation. The U6 measure of the unemployment rate, which includes discouraged workers and those forced to accept part- instead of full-time work, is expected to hold at 8.2%, roughly two full percentage points above the level in 2019. We saw a particularly large jump in the ranks of workers forced to accept part- instead of full-time work last month. That is a sign of underemployment in the economy. 

The labor market has been in an odd state for the better part of the last year, with very little churn, or what is known as healthy turnover. Those who have jobs are clinging to them, while those without are left wanting. The result is a sense of being frozen or left in a sort of labor market purgatory.