Unemployment is ticking up. At the same time, forces like AI adoption, immigration policy shifts, tariffs, and inflation are quietly reshaping who’s available to hire, what they cost, and how much customers are willing to spend.
Understanding where employment is headed matters now more than ever. Labor costs affect everything from pricing and expansion plans to customer demand and cash flow. And because access to capital is often shaped by a business’s ability to manage those pressures, lenders are watching these trends closely.
To make sense of what’s ahead, I turned to Ben Johnston, COO of Kapitus, a small business lender and marketplace that works closely with entrepreneurs navigating these pressures every day.
Johnston offers a grounded, data-driven look at why the labor market looks “looser” on paper but still feels tight in practice—and what small business owners need to pay attention to now as they plan for 2026.
What follows isn’t a forecast meant to scare you. It’s a reality check—one designed to help you anticipate changes in hiring, wages, and demand before they show up on your balance sheet.
—Rieva Lesonsky
Small Business Labor Market
Finding responsible, dedicated employees at affordable wages is a constant struggle for small businesses. Despite an extended period of high interest rates and recent softness in job creation numbers, labor markets remain surprisingly tight.
However, we have seen the unemployment rate creep steadily higher for the last two and a half years. As of September, unemployment sat at 4.4%, up from a low 3.4% in April 2023. In some ways, slightly higher unemployment may be a good thing for small businesses that suffered through difficult times as the U.S. economy emerged from COVID.
During that time, small businesses struggled to rehire and retain employees as demand for goods and services surged. However, while higher unemployment makes hiring quality candidates more affordable, higher unemployment also suppresses wage growth and weighs on consumer spending, the primary driver of small business revenue.
Challenges Impacting Small Businesses with Hiring
As unemployment rises, small businesses are benefiting from a less competitive labor market. This, we believe, is a product of competing forces, one driven by AI and automation, which allows corporate America to do more with less and loosens its dependency on the labor market.
The other is the impact of the Federal Government’s changes to the H-1B program and crackdown on undocumented immigration. Restrictions on the availability of foreign labor reduce the labor supply and ultimately make hiring more expensive.
AI and Automation
We believe that AI is beginning to displace workers, especially in white-collar jobs. Companies are currently investing heavily in AI technologies that can analyze data and make decisions quickly that once required human judgment. For example, companies are using natural language models to search the web for information, access proprietary corporate data, and collect information from third-party data sources, to then synthesize this information and draw business conclusions that once could only be determined by a human.
At the moment, these actions have been largely contained within traditional white-collar functions such as data analytics, underwriting, editing, and written communication. However, with the advent of more sophisticated, specialized robotics, we see the potential for combining AI technologies with mechanical actions capable of simulating many of the physical functions currently required for blue-collar jobs. These jobs include truck and delivery cab drivers, dock workers, factory workers, warehouse logistics operators, and, at some point in the future, even contractors and home healthcare workers.
Work Visa Reduction
We don’t expect the federal government’s decision to charge $100,000 per new H-1B visa to have a significant impact on small- or medium-sized businesses. This is because the primary applicants for these visas are concentrated in the world’s largest technology and consulting firms. We expect that these companies can afford to pay the fee if it means accessing top talent that they have difficulty finding in the U.S.
However, given other changes to the program that give higher-wage earners a greater likelihood of selection, we expect to see a shift in the visas awarded toward older, more experienced applicants. This could affect U.S. universities, which in recent years have increased their enrollment of international students. Many international students come to U.S. schools with the expectation they’ll be able to work here under the H-1B program upon graduation. If fewer visas are available to lower-wage earners, this may curb demand for a U.S. education among some international students.
Economic Challenges
Despite the labor market being softer today than it was a year ago, small businesses are struggling with other obstacles that are placing pressure on margins. Tariffs have driven up the cost of goods for most small businesses, forcing them to decide how much of that cost to pass on to the end customer and how much to cover themselves.
At the same time, inflation is putting pressure on consumer sentiment and spending, making demand more challenging to gauge. As a result, many small businesses are scaling back their plans for expansion and are keeping a close eye on their cash positions.
Ben Johnston is the COO of Kapitus, a small business lender and marketplace.
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