- US and European labor markets appear to be in good shape, with headline unemployment rates near historic lows. But three strong undercurrents (immigration policy, energy-price shock and AI) are churning beneath the calm surface. Demand for workers had already begun to soften before the shock of the Middle East crisis: vacancy rates were easing and hiring rates cooling from uncertainty and the trade war. The shift in immigration policy in the US, the UK and Germany is adding to the mix: Fading immigration inflows have quickly translated into lower employment numbers. In the US, immigration has gone from contributing over half of job creation in 2024 to near-absent in 2025 – weighing on potential growth and risking sectoral labor shortages, while offering a short-term offset against rising unemployment.
- The Iran shock will land unevenly on labor markets depending on countries’ energy exposure and the duration of the conflict. Still, we see only a limited increase in unemployment rates in the range of 0.1-0.3pp. If the crisis is resolved by end-May, unemployment rates would rise only in the most exposed European economies, and by +0.1pp at most, with 102,000 jobs lost in the Eurozone and half that in the US. Unlike in 2022, when labor hoarding led to falling unemployment, leaner buffers today could see any shock frontloaded into unemployment. In case of a prolonged closure of the Strait of Hormuz, the energy shock would hit Europe harder than the US, though higher labor protection standards provide some cushion: an estimated 225,000 jobs would be lost (0.13% of employment) in the Eurozone versus 126,000 (0.08%) in the US, with higher losses in Germany, Poland, Italy, France and Spain due to high energy exposure.
- AI’s labor-market effects are emerging, pointing to a K-shaped pattern, with youth and mid-level white-collar workers most at risk. Early evidence shows pressure on younger and less experienced white-collar workers in routine cognitive tasks, while gains accrue to higher-skilled, AI-complementary roles. Since late 2022, higher AI adoption has been associated with larger increases in youth unemployment, with AI exposure explaining about 40% of cross-country variation (excluding high-unemployment economies). AI may therefore appear first not as job loss but as fewer entry points, weaker wage growth, and sharper polarization, with reallocation driven mainly by shifts in job composition rather than wage pressures in labor-intensive activities predicted by Baumol.
- In the medium term, the AI labor-market impact will be substantial, uneven across countries and unprecedented in the scale of workforce reorganization required. Over the next 1-3 years, AI is expected to affect 23.3% of jobs across major economies, with reorganization (10.4% of jobs) dominating augmentation (5.3%) and outright displacement (7.6%). The share of jobs affected ranges from 9.2% in Italy to 28.7% in the US, with the UK (17.7%), Germany (16.2%), France (14.7%) and Spain (12.4%) in between. That is equivalent to 52.5mn jobs in the US and 21.8mn across the major European economies. Our analysis does not account for potential AI-related job growth, which we expect to at least partially offset adverse employment effects. However, job displacement is likely to outpace job creation in the medium term, as firms adjust faster than workers, creating a temporary gap. Ultimately, whether – and how quickly – AI leads to job losses, reorganization, or new job creation will depend less on technology than on policy choices. AI-proofing policy frameworks will be critical: labor-market policies, including re- and upskilling, active labor-market programs, and social protection, will shape worker transitions. Taxation (including the relative treatment of labor and AI capital), firm incentives, and competition policy will determine whether AI is deployed to augment or replace labor and how broadly productivity gains are shared.