In brief: October 2026 data shows a slow labor market, with U.S. employers adding just 29,000 jobs in September and inflation rising to 3.7%. Demand for certain technical skills remains strong, AI is changing work within existing jobs, and pay transparency laws keep expanding. Compensation teams need to decide where pay must move when budgets have little room to grow.
This is news to know for HR leaders.
October brought more evidence that the labor market is struggling to gain momentum, even as inflation continues to squeeze workers' paychecks. U.S. employers added just 29,000 jobs in September, unemployment edged up to 4.2%, and consumer prices rose 3.7% over the past year. For organizations finalizing their 2027 compensation budgets, the numbers aren't particularly reassuring.
At the same time, demand for certain technical skills remains strong, AI is changing the work employees do within existing roles, and pay transparency requirements continue to expand.
For compensation teams, the challenge is figuring out where pay needs to move when budgets have little room to grow.
Below, we look at the latest labor market developments, compensation research, and economic news shaping pay decisions heading into 2027.
The U.S. economy and labor market
The September Employment Situation was released on October 2 and showed that U.S. employers added just 29,000 jobs, with the unemployment rate rising to 4.2%.
Healthcare continued adding jobs, although at a slower pace than its average over the previous year. Most other major industries saw little change in employment.
Revisions to previous months were also worth watching. July payrolls were revised down to a loss of 10,000 jobs, while August's previously reported gain of 162,000 was reduced to 133,000. Together, the revisions removed 60,000 jobs from earlier estimates.
The August JOLTS (Job Openings and Labour Turnover Survey) came out on 29th September and provided some further context. Job openings were at 7.1 million, hires at 5.2 million and quits at about 3.1 million.
October's Indeed Hiring Lab labor market snapshot showed a market where hiring and firing were at very low levels. While total job postings have increased recently, new postings haven't increased by nearly as much.
For compensation leaders, this creates a confusing planning environment. Hiring may be slow overall, but demand for individual roles and skills can still move in the opposite direction.
The labor market is cooling, but some skills are getting more expensive
From Indeed Hiring Lab's October research, advertised wages rose just 2.4% year on year in September. That said, some technical roles are seeing much more significant increases.
Electrical engineering advertised wages up 5.6%, IT systems and solutions up 4.7%. Demand for data center talent is particularly striking; Indeed found that job postings related to data centers increased another 20% in just three months and stood 147% above June 2024 levels.
An employer hiring electrical engineers to support data center infrastructure may face a very different market than one filling a general administrative position. And a company relying on national wage growth averages could easily miss those differences.
For compensation teams, the question isn't whether the labor market is competitive but which roles are competitive, and what employers need to pay to attract and retain the people who fill them.
Inflation is putting more pressure on employee pay
Inflation accelerated again in September.
The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 0.6% in September and 3.7% over the previous 12 months, up from 3.4% in August.
Energy prices were a major contributor to the month-on-month increase. Gas prices went up 9.1% and shelter costs up 0.4%.
Meanwhile employees' purchasing power was eroding. Real average hourly earnings (BLS Real Earnings) were down 0.5% from August to September and 0.7% over the prior 12 months.
Employers are planning about a 3.5% salary increase for 2027. While inflation may change before those increases take effect, employees feel the gap between what their paychecks say and what they can buy.
That doesn't mean employers should automatically match salary increases to inflation. Compensation decisions still need to account for market rates, performance, internal equity, and affordability.
But organizations should be ready to explain their pay approach, especially when employees see their purchasing power eroding.
AI is changing work inside existing jobs
We've spent much of 2026 discussing whether AI will replace jobs. New research suggests compensation teams should be paying just as much attention to how AI is changing the jobs that remain.
The September edition of Revelio Labs' AI Labor Market Tracker, published October 1, found that 90% of year-over-year changes in work activities occurred within occupations, rather than through shifts between occupations.
An organization might still employ the same number of financial analysts, marketers, or software developers, but those employees' work may change substantially.
The research also found that only 7.2% of workers have at least one AI skill identified in its workforce data, suggesting that AI-related capabilities remain far from universal.
For compensation teams, that raises questions about whether existing job descriptions, levels, and salary ranges still reflect the work being performed.
Not every AI skill should automatically command a premium. Some will become standard expectations for a role, while others may represent meaningful expertise that employers compete to acquire.
The great reshaping of jobs
A new McKinsey Global Institute report (Workforce in Motion, published 29 September) examines how AI, automation, and the broader economic landscape could reshape the U.S. workforce over the next 10 years. The report estimates that roughly 11 million workers in declining occupations may need to transition into new jobs, with outcomes ranging from 6 million to 16 million depending on the pace and impact of automation.
Importantly, the same McKinsey's analysis suggests the economy could create more jobs than it loses to automation. The question then becomes: how do you help the workforce transition from disappearing jobs to growing ones?
And those growing jobs will be the ones that require different, more advanced skills.
For employers, workforce planning can no longer be completely divorced from compensation planning.
Reskilling the workforce may be more practical than trying to compete for scarce external talent. You also have to consider whether the skills people acquire through reskilling actually change their market value, especially when they're asked to take on more complex responsibilities without a title change.
The Federal Reserve holds rates steady
After the September rate hike, the Fed took a different approach in October.
On October 28, the Federal Open Market Committee voted to maintain the federal funds target range at 3.75% to 4%.
The Fed described economic activity as expanding at a strong pace, supported by resilient spending, productivity growth, and capital investment. But since inflation remained elevated, the committee emphasized the need for more information before deciding its next move.
For employers, the decision could increase uncertainty around 2027 budgets. Higher borrowing costs and persistent inflation can pressure business spending, even as organizations keep investing in technology and critical talent.
This means that compensation teams may have to balance broad salary increases, targeted market adjustments, and investments in future workforce skills.
Pay transparency requirements continue to expand
Pay transparency gained momentum in October, with new requirements taking effect in the U.S. and legislation advancing internationally.
Connecticut's expanded law took effect October 1, requiring employers of all sizes to include wage ranges and a general description of benefits in internal and external job postings.
Meanwhile, California signed legislation that will increase penalties for repeat pay data reporting violations beginning January 1, 2027.
On the international front, Greece became the fifth EU member state to transpose the Pay Transparency Directive, while France, the Czech Republic, Finland, Bulgaria, and Denmark continue advancing legislation.
According to Payscale's October Legislative Lowdown, these developments are making pay transparency an increasingly important compliance consideration for organizations operating across multiple jurisdictions.
But compliance is only part of the challenge. As salary ranges become more visible, employers must ensure those ranges accurately reflect the jobs they advertise and their internal compensation structures.
That gets more complicated as roles change because of AI, skills requirements evolve, and market pay moves at different speeds across occupations.
What should employers do now
October's developments give HR and compensation leaders several priorities as 2027 approaches.
- Look beyond the national hiring numbers. Overall job growth is weak, but technical occupations and data center-related roles show that demand can remain strong in specific markets. Review market pricing for critical positions rather than assuming hiring conditions are the same everywhere.
- Think about purchasing power when communicating pay decisions. Inflation reached 3.7% in September, while real hourly earnings declined. This may mean employees are less satisfied with increases that don't translate into meaningful improvements in purchasing power.
- Review how AI is changing existing roles. Job titles alone may not capture new responsibilities or skills requirements. Work with managers to identify where AI has materially changed a job's scope, complexity, or value.
- Link workforce planning to compensation planning. As organizations invest in automation and reskilling, they should also consider how employees' changing capabilities affect job levels, career progression, and pay.
- Ensure your salary ranges are easier to explain and defend. Pay transparency requires more than publishing numbers. Align job descriptions, market benchmarks, internal structures, and compensation policies.
How Payscale can help
October's data reinforces a familiar issue for compensation teams: the labor market doesn't move in unison. Hiring can slow while certain skills become more expensive, employees may see salary increases while losing purchasing power, and AI can very well change what a job requires long before an organization updates its description or salary range.
Payscale Intelligence Cloud brings compensation data and workflows together to help organizations respond:
- Benchmarking – Price jobs against relevant market data and understand where pay pressure is actually moving instead of relying on broad labor market averages.
- Job management – Keep job descriptions, levels, families, and compensation data aligned as roles and skills change.
- Pay transparency – Build defensible ranges backed by market data and a compensation structure employees, candidates, and managers can understand.
- Compensation planning – Put limited salary dollars where they matter most, with the data and workflows needed to support consistent pay decisions.
With 2027 planning in full swing, the compensation team needs to know more than just the average employer's planned spend. They need to know which jobs will change, where market pressure is building, and how to deploy their limited compensation budget.
Ask for a demo to see how Payscale can help your organization to make more confident compensation decisions.
