Unemployment can spike even when there is job growth due to several complex and interacting factors in the labor market. Although new jobs are being created, the overall unemployment rate may rise because of changes in labor demand and supply, revisions in employment data, and shifts in worker behavior and economic conditions.
One key reason is that job growth has slowed dramatically after a period of rapid expansion. Following the sharp rebound from the pandemic, when businesses aggressively rehired and demand for workers exceeded supply, the U.S. labor market has cooled. Job growth, which averaged several hundred thousand new jobs per month between 2021 and 2023, has nearly stalled in 2025. For example, the three-month moving average of job additions fell from 232,000 in January 2025 to just 29,000 in August 2025. This slowdown means fewer new jobs are available to absorb new entrants or those returning to the labor force, contributing to a rise in unemployment despite some ongoing job creation[1].
Another factor is the downward revision of previous employment gains. Official data revisions showed that employment gains in May and June 2025 were lower than initially reported. This adjustment reduces the net job growth figures and can make the labor market appear weaker than first thought, which may coincide with a rising unemployment rate[1].
Economic uncertainty also plays a significant role. Businesses face challenges such as tariff uncertainty, fears of recession, tighter financial conditions, and tepid consumer spending. These factors make employers cautious about hiring new staff, even if some jobs are still being added. This cautious approach can slow job growth and increase layoffs or discourage hiring, pushing unemployment higher[1].
Labor market dynamics also involve changes in labor supply. Fed Chairman Jerome Powell described the current labor market as a “curious kind of balance,” where both labor demand and supply have dropped simultaneously. This means that while fewer jobs are available, fewer people may be actively seeking work, or some workers may be temporarily out of the labor force. However, if more people start looking for jobs again or if layoffs increase, the unemployment rate can rise even if job openings remain relatively stable[1].
Data from the Chicago Fed Labor Market Indicators show that layoffs and separations have remained steady, but the hiring rate for unemployed workers has declined slightly from previous years. The real-time unemployment rate forecast for September 2025 was around 4.34%, slightly higher than the previous year’s 4.09%. This suggests that while jobs exist, the rate at which unemployed workers are being hired is not keeping pace with the number of people entering or re-entering the labor force[2].
The U.S. Bureau of Labor Statistics reported that job openings remained steady at 7.2 million in August 2025, but hires and separations were little changed. Quits and layoffs also remained stable, indicating a labor market that is not rapidly expanding or contracting but is somewhat frozen. This stagnation can contribute to a rising unemployment rate if the number of people seeking jobs grows faster than the number of jobs filled[3].
Additionally, an unofficial nationwide hiring freeze has been noted, which means many employers are holding back on adding new employees despite having open positions. This freeze can cause unemployment to rise slightly as job seekers face more competition for fewer filled roles, even if the total number of job openings does not decline significantly[4].
In summary, unemployment can increase despite job growth because the pace of job creation slows, previous job gains are revised downward, economic uncertainty causes hiring caution, labor supply and demand both decline, and hiring rates for unemployed workers drop. These factors combine to create a labor market where jobs exist but are not sufficient or accessible enough to prevent a rise in unemployment.