The big picture: The immediate concern AI poses to the economy is its drag on job creation amid a broader softening. The current weakness is more cyclical than structural. Yet whether AI's influence grows into a more dominant factor – and how much lasting harm it may do to the newest cohort of workers – remains an open question.
Federal Reserve Chair Jerome Powell acknowledged that the US labor market is presenting unusual challenges for young and minority workers, at a time when both a broader economic slowdown and the rapid spread of artificial intelligence are reshaping job opportunities. Speaking after the Federal Open Market Committee's September meeting, Powell described conditions as a "low firing, low hiring environment," with recent graduates particularly vulnerable.
"The economy has simply slowed down and job creation has broadly slowed down with it," he recently told Fortune.
Signs of strain have become more pronounced in recent months. The African American unemployment rate climbed above 7 percent in August, and the jobless rate for new graduates now exceeds the overall national figure – an uncommon reversal. Economists and policymakers are increasingly debating the role AI may be playing in this weaker start for early-career workers. Some research suggests that companies that once relied on new graduates for entry-level tasks are beginning to automate routine work instead, limiting opportunities for those at the very start of their careers.
Powell has walked a careful line on the technology's impact. Testifying before the Senate Banking Committee in June, he warned that AI could replace many jobs in the near term rather than merely augmenting workers' labor. He described AI as a transformational technology whose full effects are impossible to predict and noted that it might boost productivity and expand hiring over time.
At his most recent press conference, Powell struck a cautious tone, acknowledging significant uncertainty over how much AI adoption is affecting hiring.
"My view, which is also a bit of a guess, but widely shared, I think, is that you are seeing some effects, but it's not the main thing driving it," Powell said.
Even so, he acknowledged the possibility that companies are now relying more heavily on AI tools for work that used to go to entry-level staff. While AI may be making it harder for some younger applicants, Powell emphasized that the larger economic context still matters most.
The latest figures show 7.4 million unemployed workers competing for 7.2 million available jobs, according to Apollo Global Management Chief Economist Torsten Slok. Outcomes also vary by gender, with unemployment rates falling among female graduates but rising among male graduates.
These pressures follow what Deutsche Bank has called "the summer AI turned ugly," a period when companies struggled with implementation even as layoffs and hiring freezes fueled fears that automation was outpacing workplace demand. Stanford economist Erik Brynjolfsson has described AI's rapid impact on entry-level roles as one of the biggest fault lines in today's labor market.
Economists remain divided over whether the current challenges facing Gen Z will leave lasting marks. For decades, scholars have studied whether starting a career during a downturn produces "permanent scars" in wages and career development. Harvard professor David Ellwood coined the phrase in 1982, and Olivier Blanchard and Lawrence Summers expanded on it in 1986, showing the enduring effects of recession-era unemployment.
Others, such as Peterson Institute President Adam Posen, argue that little evidence of long-term damage has emerged since the financial crisis of 2008. Yet researchers, including David Blanchflower of Dartmouth College and Alex Bryson of University College London, highlight another form of fallout: rising despair among young workers, even in years when unemployment figures appeared healthier.
"The despair has been unmistakable across the past decade," Blanchflower told Fortune, noting that this generation now faces added strains from both cyclical weakness and technological disruption.