172,000 Jobs Added in May, But Young Graduates Left Behind

The U.S. economy added 172,000 jobs in May, far exceeding economists’ expectations of roughly 85,000 and marking the third consecutive month of solid hiring. The unemployment rate held steady at 4.3%. Yet beneath these encouraging headline numbers lies a troubling parallel story: recent college graduates are facing one of the toughest entry-level job markets in years, with underemployment nearing 43% and unemployment at 5.6% — higher than the national average for all workers.

A Jobs Report That Beat Expectations

The Bureau of Labor Statistics reported Friday that job gains for March and April were also revised significantly higher — March from +185,000 to +214,000, and April from +115,000 to +179,000 — a combined upward revision of 93,000 jobs. Over the last three months, employers added an average of 188,000 jobs per month, showing that hiring has picked up steam after anemic growth last year, as NPR reported.

“Hiring was more broad-based in May than we’ve seen in the last few years,” Dr. Nela Richardson, ADP’s chief economist, said in a statement. “The labor market continues to show sustained momentum going into the summer hiring season,” as The Guardian noted.

Where the Jobs Are — and Aren’t

The sector breakdown reveals a sharp divide. Leisure and hospitality added 70,000 jobs, including 48,000 in food services and drinking places. Local government added 55,000 positions, and healthcare contributed 35,200 jobs. Manufacturing added 7,000 jobs, topping expectations, according to Fox Business.

But the financial activities sector shed 22,000 jobs in May, driven by losses at insurance carriers (-10,700) and commercial banking (-2,600). The sector is now down 107,000 jobs from its peak in May 2025. Average hourly wages rose 3.4% year-over-year — likely trailing inflation, which stood at 3.8% for the 12 months ending in April, as Yahoo Finance reported.

The Graduate Crisis: A Separate Labor Market

While the overall jobs picture brightens, a different story is unfolding for the Class of 2026. The underemployment rate for graduates aged 22–27 has reached approximately 43%, up more than three percentage points in a single year, according to data from the Federal Reserve Bank of New York. The unemployment rate for recent college graduates hit 5.6% in late 2025 — higher than the national average for all workers.

This is not a cyclical blip. The NY Fed’s research suggests a structural shift: unemployment among college graduates under 29 averaged 3.1% from 2017 to 2019 but rose to 3.7% from 2022 to 2025. During the same period, unemployment for more experienced college graduates actually declined from 1.9% to 1.8%, highlighting that the challenge is uniquely concentrated among new entrants to the workforce.

Remote Work, Not AI, Is the Primary Culprit

Contrary to popular narratives blaming artificial intelligence, a New York Fed study published June 1 finds that remote work accounts for 64% of the increase in youth unemployment among college graduates. Researchers Natalia Emanuel, Emma Harrington, and Amanda Pallais found that companies are reluctant to hire less-experienced workers in distributed work arrangements because remote work makes training and mentoring new employees significantly more difficult.

“Since so many young college graduates are in remotable occupations, our back-of-the-envelope calculation indicates that remote work can explain 64 percent of the increase in unemployment for all young college graduates between 2017-2019 and 2022-2024,” the authors wrote, as PYMNTS reported.

This finding is supported by firm-level data showing that when offices were closed during the pandemic, companies hired fewer inexperienced workers. When offices reopened, hiring of younger workers resumed — but only for co-located teams. For distributed teams, companies consistently preferred experienced hires.

AI and Other Structural Factors

AI is not off the hook entirely. Stanford researchers found that workers aged 22–25 in AI-exposed jobs saw a 16% relative drop in employment in under three years. Entry-level job postings dropped 16% between 2023 and 2025 in AI-exposed sectors, according to Handshake and Stanford research. Fields like data entry (-29%), software development (-24%), and customer service (-19%) have seen the steepest declines in postings.

The NY Fed researchers acknowledge that “generative AI and other factors may play a more primary role in determining the employment patterns of younger workers going forward.” But the timing of the surge — predating the rapid diffusion of AI — points to remote work as the dominant factor so far.

Why the Disconnect?

The apparent contradiction between a strong jobs report and a weak graduate job market resolves when you look at which sectors are hiring. The 70,000 jobs added in leisure and hospitality, the 55,000 in local government, and the 35,000 in healthcare are largely in roles that do not require a college degree or offer the career-launching trajectory graduates seek. Meanwhile, the financial sector — a traditional destination for new graduates — continues to shrink.

Other structural factors compound the problem:

• Reduced churn: Fewer people voluntarily leaving jobs means fewer openings flow down to new graduates
• Skills-based hiring: 70% of employers now use skills-based hiring, up from 65% last year, according to NACE
• Policy uncertainty: Tariff changes, inflation pressure, and federal workforce cuts are causing business leaders to hesitate on expanding headcount
• Fields with built-in pipelines fare much better: Nursing unemployment is 1.4%, engineering 2.3%, while liberal arts graduates face 6.4% unemployment

Fed and Political Implications

The strong jobs report puts Federal Reserve Chair Kevin Warsh in a politically delicate position. President Trump has been pressuring the Fed to cut interest rates, but with job creation well above the Fed’s estimate of breakeven and inflation at 3.8% — well above the 2% target — the case for rate cuts is weak.

“Job creation above 150,000 — very comfortably exceeding the Fed’s estimate of breakeven and also broad-based in nature — comes alongside inflation that remains above target and is expected to trend higher in coming months,” Seema Shah, chief global strategist at Principal Asset Management, told Fox Business. “In effect, both sides of the Fed’s dual mandate argue against cuts at this stage.”

Treasury Secretary Scott Bessent expressed confidence in Warsh at a news conference last week: “We’ve got a Warsh Fed now. It’s a new day at the Fed… I believe that he will do the right thing to balance inflation and growth.”

Prices have been rising rapidly since the U.S. launched its war with Iran just over three months ago, adding another layer of uncertainty. The Fed’s next policy meeting is June 16–17, and economists widely predict rates will be held steady.

What to Watch For

The dual labor market — strong for experienced workers and certain sectors, weak for new graduates — raises several questions:

1. Will the Fed cut rates despite the strong jobs report? Most economists say no, but political pressure from the White House will intensify.
2. How will the Iran war affect inflation and hiring? The conflict has already driven prices higher, and further escalation could reshape the economic landscape.
3. Can policy interventions address the graduate crisis? The structural nature of the problem — driven by remote work, AI, and skills-based hiring — suggests no quick fixes.
4. Will the summer hiring season absorb more young graduates? Or will the structural barriers persist even as overall hiring remains strong?

For the Class of 2026, the message is clear: a strong economy does not guarantee a strong start. The jobs are there — but increasingly, they are not the jobs that launch careers.