Weekly Economic & Business Outlook

What the Staffing Industry Should Know About Tariffs

Tariffs are perhaps the greatest incoming threat against a full-fledged recovery for the staffing industry and soft landing for the U.S. economy overall. When considering their effects, it is important to first understand what tariffs are: a tax by the government paid for importing foreign products. When businesses have to pay more for importing materials, either selling them as final goods or incorporating them within their own products as intermediate purchases, they simply increase prices in-kind for consumers. This is why tariffs are inflationary and, right now, additional inflation is the last thing the labor market needs. For the past two years, higher prices as well as the interest rates meant to bring them down have accelerated borrowing costs and affected employers’ appetites to hire more workers, which has driven a dearth in new orders for staffing firms.

As an inflation-causing agent, tariffs will have direct and indirect effects on the labor market. First, for industries where imports are vital to their overall business, employers will have to contend with higher operating costs which will further constrain their capacity to onboard additional headcount. These direct effects are likely to be concentrated within the manufacturing sector, which naturally consumes a higher share of imports than other segments of the economy, meaning light industrial demand for temporary workers could see further stagnation due to higher operating costs and reduced margins for employers.

Use of Imports – Inner vs. Distribution of Staffing Employment by Sector – Outer

Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, ASA Research Department

But with consumers spending more money, increased inflation induced by tariffs also will cause interest rates and compensation costs to remain elevated; these indirect effects are likely to be much more diversified throughout the economy. When considering the consequences of inflation-induced increases in compensation costs on layoffs and discharges from the workforce, employers within most industries have a “parabolic demand curve.” This means inflation-induced increases in compensation costs actually lead to lower layoffs and discharges but, if too much, prompt employers to reduce staff. Why the initial decrease? Modest increases in inflation and compensation costs are signs of a growing economy where consumers are willing to spend more, which results in higher profits and, potentially, more capital to obtain headcount. But if inflation-induced compensation costs rise unchecked, consumers eventually spend less, leading companies to tighten their belts.

Parabolic Propensity for Layoffs, Given Inflation-Induced Increases in Staffing Employment

Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, ASA Research Department

Nonparabolic Propensity for Layoffs, Given Inflation-Induced Increases in Staffing Employment

Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, ASA Research Department

This honeymoon period between inflation-induced increases in compensation costs as well as layoffs and discharges is shortest among goods-producing sectors including utilities, transportation and warehousing, and construction. In other words, goods-producing sectors of the economy are often the first to experience layoffs driven by inflation-induced increases in compensation costs, further suggesting that light industrial demand could remain a drag for staffing employment. However, there are a handful of sectors where employers do not have a parabolic demand curve. Service-providing sectors with high employee leverage driven by frequent turnover such as trade, accommodation and food services, as well as other services, see layoffs and discharges continue to decline amid higher compensation costs driven by inflation. Conversely, professional business services, where employees generally have lower leverage over employers due to pervasive tradeoffs between investing in more labor or capital, see layoffs and discharges continue to increase amid higher compensation costs driven by inflation. 

Demand for temporary workers within service-providing segments of the economy with high turnover could serve to bolster staffing employment. Both these direct and indirect effects could be minimal if tariffs are indeed temporary and enable the United States to negotiate better trade deals with other countries. Already, the administration has enacted a pause in reciprocal tariffs and claimed that there are 75 nations willing to discuss terms for an end to hostilities. However, both the outlook for such negotiations and future trade policy remains highly uncertain, underscoring the limits of gaging a concrete assessment of the impact of tariffs on the staffing industry and U.S. economy at-large. These analyses are meant to provide educated best guesses for how supply and demand dynamics within the labor market may change due to tariffs, and what they mean for the ongoing recovery in staffing employment.

Drop in Candidate Confidence Tracks With Loosening Labor Market

The economic optimism that much of the business community felt at the start of the year has waned. Within staffing, the anticipation that the industry would finally bounce back after the year-over-year losses in 2023–2024 looks to be deferred further into the future. So far in 2025, the ASA Staffing Index has hovered around a value in the low 80s; it’s recovery hampered in large part by both employer-side and worker-side hesitancy. 

Many staffing clients are adopting a wait-and-see approach to hiring due to economic uncertainty; putting off acquiring new workers they might not be able to afford in the future. But at the same time holding on to the workers they have in case demand surges. Workers themselves are taking a similar approach as more are choosing to stay put in the face of uncertain job prospects. The Eagle Hill Employee Retention Index increased in the first quarter of this year, driven in large part by sliding candidate perceptions of current job market opportunities. The Retention Index fell by six points at the end of 2024 to then regain four points in the first quarter, suggesting an uptick in worker retention in the next six months. 

The dip in employee optimism is likely not just fueled by hypothetical concerns for the future. Data from the U.S. Bureau of Labor Statistics supports the sentiment that it’s harder for a job seeker today as the unemployment rate ticks up and those without jobs find they must wait longer to get one. The increase in retention results in a decrease in turnover, which means both potential clients and candidates have less reason to utilize staffing services. Employers do not need to replace headcount as often and workers aren’t as willing to dislodge themselves from the positions they have, leading to less staffing demand. With unemployment forecasted to further edge up throughout the year to 4.5%, the industry faces a dual challenge of securing business and attracting quality talent, a situation likely to persist at least in the near term.