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The ongoing “no-hire, no-fire” trend in the US labor market underscores an economy grappling with a complex mix of issues ranging from AI-driven disruption, broader macroeconomic instability and persistent political uncertainty.
We sat down with Damien Dwin, the CEO of Lafayette Square to unpack how some of these issues have fallen through the cracks, leading to potential mispricing of middle-market debt.
Lafayette Square is a direct lender investing in lower middle market companies, and particularly those untouched by private equity. Dwin’s team dives into the weeds of managing human capital on a zip-code level, tracking not only the turnover rates but also financial security of workers and hiring mismatch.
1. Some economists have flagged the labor market could be showing signs of weakening. What are you seeing with your portfolio?
Lafayette Square focuses on non-sponsored, middle market companies. Many of the businesses we support are in the services industry, and what we are seeing is strength. There is revenue growth. There is EBITDA growth. But there is this unspoken story about wage growth and the financial security of workers. While businesses show strong metrics, worker wages are not keeping pace with cost of living, a credit risk most lenders overlook.
2. How different does the labor picture look depending on geography?
Multiple government and private sources are telling us what the actual cost of living is by market around the US. It is a zip code level analysis that needs to be undertaken to understand the real challenges facing American workers. What is happening in southwest Louisiana is very different from what is happening in southern Connecticut, and that has to be taken into account when making statements about where we are holistically with the economy.
Fundamentally, this is a place-based economy. It is worthy of zip code level inspection to understand the challenges and the opportunities that exist in each corner.
3. What narratives do you see with employers? Where has the most stress in the labor pool right now — hiring, retention, or productivity?
I think the narrative is that employers are struggling to find the workers to do the job.
There is greater demand for labor than available supply, and it is on both ends of the spectrum – lower-wage service roles and highly specialized technical positions.
This is not just a hiring problem. It is a skills and willingness mismatch that speaks directly to credit risk. When we underwrite a loan, we need to understand the financial wellness of that company’s labor pool, what the turnover risk is, and whether or not they are able to retain the workers they need to deliver on their business plan.
This is a multi-decade rotation in workforce training, and lenders who do not factor workforce stability into their underwriting are missing a critical risk variable.
4. You’ve described a multi-decade rotation in workforce training. What do you mean by that, and how does AI factor into it?
I am an optimist. I think in the end, America will lead the world in productivity and will be the destination for the best talent on Earth. But the genie is out of the bottle. AI is accelerating, and it is fundamentally changing what skills workers need and what roles exist. Workers face real pressure to retrain or risk being left behind.
As lenders, we need to understand how companies are preparing for this transition.
5. How has all of this changed the way you underwrite labor risk today compared with 12–18 months ago?
Workforce risk has always been part of our underwriting, but the last 12–18 months have made it impossible to ignore. The labor market has gotten tighter, cost of living pressures on workers have intensified, and AI is accelerating the skills mismatch we are seeing across industries.
Most lenders still do not track employee turnover or benefits participation. They make a loan based on EBITDA and move on. We are seeing companies with strong financial metrics sitting on fragile labor foundations. That is a credit problem waiting to happen, and it is not priced into most middle-market lending today. With real-time labor market data at the zip code level, we can see what workforce challenges are most acute. The more you understand the workforce, the better lender you become.
6. You’ve raised the idea of “financial security” of the labor pool. How does employee financial stress translate into credit risk for your borrowers?
This is a risk factor that has to be underwritten before you lend money to a company. What is the financial wellness of the labor pool? What is the stability of the workforce? It goes much deeper than turnover. Middle market companies may have pricing power with their customers, but if they do not have enough stable workers to deliver, that pricing power means nothing.
From an underwriting perspective, the data is clear: under-enrollment in healthcare and retirement benefits correlates with higher turnover and lower productivity. When benefit participation rises and turnover comes down, productivity improves and borrower risk declines.
7. Are companies generally able to pass higher labor costs through pricing, or are margins still absorbing the pressure?
It varies significantly by geography and sector. In markets where labor is particularly tight, some businesses have been able to pass through costs to customers. But in more competitive markets or commoditized sectors, margins are absorbing more of the pressure.
8. What labor-related metrics do you monitor most closely at the portfolio level? What signals would prompt concern before it shows up in earnings?
In addition to benefits adoption and turnover, we track workforce composition across the entire portfolio: total workforce size, percentage of low-to-moderate income workers, geographic concentration, and whether companies are substantial employers in working-class communities. What we are seeing now is that labor pressure is not evenly distributed, it is highly sector- and geography-specific. In our upcoming 10-K filing, we plan to showcase this data across three dimensions: industry, geography, and vintage. We use this mandatory public filing as an opportunity to demonstrate transparency around both our financial performance and our human capital metrics.
The early warning signal we are watching is when multiple companies in the same region or industry start showing workforce stress simultaneously. For example, if our healthcare services companies in the Southeast are all experiencing hiring difficulties and wage pressure while our manufacturing companies in the Midwest are not, that tells us there is a regional labor market dislocation that will eventually impact credit performance in that segment. That geographic- and sector-specific intelligence allows us to underwrite labor risk at the deal level and monitor it systematically as we scale.
9. Looking ahead to the rest of 2026, if labor conditions stabilize or improve, how does that change credit outcomes for middle-market borrowers? Does it meaningfully support growth, refinancing activity, or lower default risk?
Labor stabilization would certainly improve credit outcomes. Better retention and controlled wage inflation translate directly into margin expansion and stronger debt service capacity. At Lafayette Square, we believe we have underwritten our portfolio to perform regardless of where labor markets head. The managerial assistance interventions we have built into our strategy give our borrowers the opportunity for a structural advantage whether conditions improve or deteriorate.
Historically, companies with lower turnover and higher benefits participation have more predictable cash flows in tight labor markets and better-positioned cost structures if conditions ease. Our credit approach is built around workforce stability as a performance driver, not a dependency on favorable macro conditions. That is how we perform through cycles.
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