The Job Market Squeeze: When Uncertainty Meets AI

Why the employment downturn has more to do with anxiety than technology

Note: modestly updated for August layoff figures

Here's a sobering reality check: if you stripped out healthcare jobs, US employment actually shrank in each of the past four months. While headlines blame AI for the job market's tailspin, the real culprit is something more fundamental – and more fixable if we change course.

The Uncertainty Economy

The job market sucks, and July's 149% spike in layoffs tells only part of the story (layoffs got worse in August, read on). Bloomberg and BCG's tracking of CEO sentiment reveals that "uncertainty" about the economy peaked higher in Q2 than during the pandemic.

Source: Bloomberg, BCG

What's driving this anxiety? Tariffs dominated earnings calls, followed by fears of trade wars and economic slowdown. Ford can't absorb $2 billion in tariff costs anymore, and they're not alone. When the WSJ Editorial Board calls out the impact on John Deere, something’s amiss.

When CEOs get spooked, they react predictably: freeze hiring, delay investments, fall back on command-and-control tactics like return-to-office mandates. They also look harder for efficiency gains – enter AI as the supposed silver bullet.

AI Displacement: The Real Story

So where is AI actually having an impact? Even in tech – where the pressure is highest – the story is more nuanced than the headlines suggest.

SignalFire's analysis shows engineering headcount is still growing at most Big Tech firms, just more slowly. AI-focused companies like Anthropic and OpenAI, are expanding rapidly. Others — Stripe, Netflix, ServiceNow, Uber — continue to grow. Engineering leaders I’ve talked with at mid-size firms report 10% productivity gains from AI tools, but it's inconsistent and hard to measure, so demands go up.

Source: SignalFire, August 2025

The tech giants aren’t shrinking — yet. Amazon and Microsoft are barely growing, Google has slowed to mid-single digits, while Meta is investing in growth.

Being an engineer at Amazon, Google or Microsoft is a far more challenging environment than it was a few years ago. Being in other departments might have gotten you laid off.

The Real Layoff Driver: DOGE

While AI-related layoffs grabbed headlines in July, they represented just 17% of total layoffs: about 10,000 jobs, and none in August. Salesforce has announced layoffs totalling 4,000 workers, with CEO Marc Benioff attributing the cause to AI and saying they reduced customer service positions — which clearly weren’t the only jobs cut.

It’s important to note that Salesforce also sells AI-driven solutions for customer service automation, and the next day announced earnings that disappointed investors. (related reading: Emperors without clothes)

But even adding all layoffs driven by cost cutting as well as technology and AI, you get to 6% of the total. The far bigger contributors are market uncertainty, decreasing demand and tariffs (24% of all layoffs) and businesses closing, being restructured or going bankrupt, a fairly normal source of layoffs in any market.

The biggest contributor in 2025? DOGE cuts account for 35% of US layoffs year to date: over 290,000 federal workers and 17,000 nonprofit employees. Those numbers also continue to increase: an additional 7,000 in August.

(Note: data was edited to update to August after original publication)

Source: Challenger & Grey, August 2025

Ironically, these cuts cost more than they saved: $135 billion in losses according to the Partnership for Public Service, while IRS cuts alone could cost over $320 billion in lost revenue over the next decade.

The DOGE cuts might be past news for many of us, but the economic consequences are likely to be felt into the future – while AI-driven displacement potentially accelerates.

The Dangerous Acceleration Ahead

The bigger issues: technology displacement of workers accelerates during downturns at rates that make it harder for people to adjust. When businesses face pressure to cut costs, they accelerate automation – and when the economy recovers, those jobs often don't come back.

Federal Reserve Governor Lisa Cook recently noted that rapid AI adoption could "affect our notion of maximum employment." JP Morgan's Murat Tasci puts it more bluntly: the next recession might bring "large scale displacement for occupations that consist of primarily non-routine cognitive tasks." aka more complex office work.

Manufacturing employment downturns in past recessions are a good case study: rapid declines in recession dips and a jobs market that didn’t come back.

Source: BLS, Axios

Replace "manufacturing" with "knowledge workers" and you get a chilling picture of permanent job loss.

What Leaders Can Do Now

The job market crisis isn't inevitable – it's the result of cascading decisions driven by fear rather than data. We may be nearing the point where CEOs of major corporations have no choice but to speak truth to power: that rising costs and increased uncertainty will lead to price increases. (But I’ve been wrong on this before.)

Here's what leaders can do within their own companies to break the cycle:

Build from engagement not fear. Continuous layoffs and return-to-office mandates driven by anxiety about productivity backfire by driving down the engagement and trust needed to get through challenging times and enable real AI-driven transformation.

Plan for AI thoughtfully. The productivity gains from AI are real but uneven. Rather than rushing to cut headcount, invest in time for teams to experiment and iterate. Most can’t do that all at once — those that focus on fewer areas see more success.

Think systemically about workforce participation. Every working mother forced out by rigid policies is both a talent loss and an economic drain. Flexibility isn't just good HR – its good for the diversity that fuels long term growth and profitability.

Resist the doom spiral. When uncertainty drives defensive decisions like layoffs, those decisions create the very economic slowdown executives fear. The most successful companies long term will be those that invest counter-cyclically in talent and innovation.

Organizations that trust their people, measure what matters, and adapt thoughtfully will emerge stronger. The question is whether your leadership team has the courage to choose the harder but more rewarding path.

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Feedback is a gift! Comment or drop me a line: brian@workforward.com

Highly related…

The Hidden Cost of RTO Demands

Return-to-office mandates aren't just about office real estate — they're causing an exodus from the workforce. We've lost the post-pandemic peak of working mothers, with labor force participation dropping over 3 percentage points among women with children under five since last September.

Source: Washington Post

Nick Bloom & co's research shows RTO demands are more likely when CEOs are older and male. As one working mother told Alana Samuels in TIME, “There’s been a shift in the zeitgeist – now, it’s ‘We don’t care about you, and you’re replaceable. It’s like we didn’t learn anything.”

Whether through ignorance of the impact or in spite of it, the impact on women leaving the workforce contributes to the overall risk of a recession: less income, less spending over some period.

Read on for much more on this topic.