Economist Perspective on U.S. Wage Growth

Weak August nonfarm #payrolls (22,000 vs 75,000 expected), alongside a slight uptick in the unemployment rate (4.3% vs 4.2% in July), likely cement the case for a 25-bps rate cut by the #Fed on September 17. The 3-month average monthly change in nonfarm payrolls stood at 29,000 jobs in August, down from 209,000 at the end of 2024. We agree with the notion that smaller increases in the labor force, by shrinking the pool of workers available to be hired, play a part in reducing the pace of employment growth. However, there are also indications that private sector demand to add jobs has softened materially since earlier this year. Layoffs remain contained, as also evidenced by range-bound initial jobless claims; but hiring has decelerated markedly, and the ratio of job openings (as measured by the JOLTS survey) to total unemployment has now fallen to 1 (in 2022, there were 2 jobs for every unemployed worker), signaling that it could get incrementally more difficult for unemployed workers to find new jobs. Historically, employment growth leads the unemployment rate by a few months. We are carefully monitoring how consumer confidence, income and spending evolve over the next few months. Recent consumer confidence data suggests that households have become more concerned about the availability of jobs and job security, reinforcing the sense that the recent low hiring/low firing environment looks increasingly precarious. At the same time, income growth does not flash a red light yet. Aggregate weekly payrolls (the product of payrolls, average hourly earnings and weekly hours worked, and a proxy for income growth) continued to grow at a relatively healthy pace (4.4% YoY), as wage growth remains robust for now (3.7% YoY). This supports the view that slower employment growth should not necessarily be a symptom of deteriorating labor market conditions, if occurring against the backdrop of a slower expansion of the labor force. That said, the trend should be monitored as much as the level, and the 3-month annualized pace has now declined to 2.4% from 5.6% at the end of 2024. In our view, this adds to the bulk of evidence that, over the summer, supply-side dynamics (i.e. labor force growth) have been joined by demand-side weakness in explaining recent softness in labor market conditions. While a September rate cut by the Fed looks increasingly likely, what happens next remains uncertain. Core CPI should continue to experience tariff-related upward pressure in Q4, limiting the Fed’s ability to commit to a preset course of action, and complicating its efforts to unify the FOMC around a consensus view. That said, our view is that a combination of political pressure and prolonged below-trend economic growth could eventually result in more frequent cuts in 2026, and the August jobs report points to the risk that this timeline could be accelerated, should labor market conditions deteriorate further. #TIAAWealthManagement #MarketOutlook

The latest batch of jobs data suggests the labour market is holding up much better than the absolutely dire survey measures suggest and that the MPC will keep on its "gradual and careful" rate cutting path. According to all the recent surveys of the labour market, hiring had basically collapsed after the budget, but the recent hard data is telling a different story. The number of people on payrolls rose by 21k in January (and December's drop was revised from -47k to just -14k). There was also a 107k increase in the (admittedly questionable) official estimate of employment in the three months to December. All in, the data is painting a picture of a labour market that is gradually easing with weak hiring rather than a sudden collapse. That's a small win, but we'll take what we can get at the minute. At the same time pay growth jumped again. Total pay was 6% y/y in December, up from 5.5% in November. More importantly, for the MPC at least, is private sector regular wage growth (this measure strips out the public sector and bonuses and is a better gauge of domestic wage pressure). This number rose to 6.2%. This is a bit of a conundrum for the MPC. On the one hand you've got the labour market weakening and growth effectively flatlining, but at 6.2% private sector pay growth is way above the 3% that's consistent with the 2% inflation target. That will keep the MPC on its "careful and gradual" path. We are still looking for three more 25bps cuts this year but if pay growth stays this strong for much longer we'll probably only get two more. Finally, economists are in the habit of focusing on what high pay growth means for interest rates (as I just did!) but strong pay growth means that real wages, which are inflation adjusted, are now growing by 2.5% y/y. Excluding the pandemic, that's the strongest real wage growth since 2015, eventually that should find its way into consumer spending. #RSMUK #RealEconomy #Pay #Jobs #InterestRates

Wage growth is cooling off Labor cost pressures will continue to ease in the coming quarters as the balance of power shifts away from workers and to employers. We extended Heise, Pearce, and Weber's (2024) labor market tightness study by expanding the regression window through Q3-2025, adding five additional quarters beyond their original sample ending in Q2-2024. The HPW Index—a composite measure combining the quits rate and vacancies-to-effective-searchers ratio (V/ES)—has declined significantly from its pandemic-era peak of approximately 2.8 in early 2022 to -0.06 in Q3-2025, marking the first negative reading since the pre-pandemic period. This represents a substantial normalization in labor market conditions, with the index now sitting just below historical average of zero (by construction, the standardized index has mean zero over the estimation sample). The HPW Index's trajectory suggests that labor market tightness has fully unwound its extraordinary post-pandemic surge, with conditions now consistent with or slightly below the 1994-2025 average. While there may be some residual momentum in wage pressures, the 0.90 correlation between the HPW Index and smoothed wage growth suggests that wage growth should continue moderating in coming quarters as the lagged effects of reduced labor market tightness work through.

If you thought strong wage growth was a sign that the US labor market was still overheated, you can put that concern to rest. According to the Employment Cost Index, compensation and wage growth continued to slow in the second quarter of the year. Wages for private sector workers, a key metric, slowed considerably over the quarter and are now growing at an annual rate of 3.4%. This is the slowest growth since September 2020. Not only is this a slower pace compared to the past few years, but the current rate is consistent with low inflation and current labor productivity growth. Even if the firming of wage growth for non-incentive-paid private sector workers—a series closely watched by the Federal Reserve—suggests that underlying wage growth is closer to 4%, this is still a sustainable rate. With the current robust labor productivity growth, employers can afford robust wage growth. Additionally, inflation-adjusted wages remain below their pre-pandemic trend, indicating that workers could benefit from an increase in purchasing power. The wage growth data aligns with other labor market indicators: this labor market is not adding fuel to the inflationary flames.

EY-Parthenon EY Macro Pulse Don't be fooled... this is a weak US labor market ⚠️ The labor market is under significant pressure from conflicting crosscurrents. Labor supply has taken a meaningful hit from aging demographics and a historic drop in #immigration, but labor demand has been weakening even faster. Whether you look at negative job growth over the past three months, recessionary levels of job growth concentration, a hiring rate at a decade low, softening wage growth, or an unemployment rate that is gradually creeping higher, the conclusion is the same: persistent policy headwinds and a high-cost, high–interest rate environment have pushed business leaders into cost-control mode. 📉 In December, the economy added just 50,000 jobs, falling short of expectations. Combined with a cumulative 76,000 downward revision to prior months, the three-month average of nonfarm payroll growth has fallen to negative 22,000. 📊 In 2025, the #economy added just 584,000 jobs—or roughly 49,000 per month—before benchmark revisions and population control adjustments. This stands in stark contrast to the 2 million jobs gained in 2024 and represents the weakest annual increase outside a recession since 2003. The January employment report will incorporate benchmark revisions to the Quarterly Census of Employment and Wages (QCEW), which preliminarily indicate that 911,000 fewer #jobs were created between April 2024 and March 2025. When combined with new Census population estimates to be released in March, there is a high likelihood that job growth in 2025 was close to zero. 📉 The #unemployment rate edged down to 4.4% in December, but this mostly reflects weaker labor market engagement, as the labor force participation rate slipped to 62.4%. Meanwhile, wage growth bounced modestly, with average hourly earnings rising 0.3% m/m and annual wage growth ticking up 0.2pp to 3.8%. Still, wage growth momentum has been on a clear downward trajectory over the past two years, as business managers have curbed entry wages and capped annual wage increases. 🧭 Taken together, these trends point to persistent fragility in the labor market as firms contend with uneven demand, elevated costs, margin pressures, and ongoing uncertainty. We expect #job growth to remain well below trend, averaging only about 30,000 per month in the first half of next year, with the unemployment rate gradually drifting higher toward 4.8%. 🏦 Taken at face value, the December #employment report would support the Fed holding rates steady in late January. However, the January employment report will likely reflect a much softer employment picture once benchmark revisions are incorporated, and the February report should confirm this softness when new Census population estimates are included. As such, we continue to believe the #Fed will deliver a 25bp rate cut in both March and June to accommodate a softening labor market as inflation hovers around 3%.

For the past few years, a large part of US job creation has quietly come from one source: the government. Roughly half of net job gains were driven by federal, state, and local hiring. That support is now fading fast, as the attached data clearly shows. Federal employment is no longer a tailwind. It has turned into a meaningful drag, with recent months showing outright contraction. This matters more than it may appear at first glance. Government hiring acted as a stabilizer while private sectors were already slowing, especially in cyclicals and parts of tech. It supported headline payroll numbers, consumer confidence, and ultimately spending. Remove that pillar, and the labor market suddenly looks more fragile. Going forward, three implications stand out. First, headline job numbers may weaken faster than expected, even if the private sector merely plateaus rather than collapses. Second, wage growth is likely to cool as public sector demand fades, reducing one of the Fed’s key inflation concerns. Third, the burden of job creation shifts fully back to the private sector at a time when higher rates, tighter credit, and margin pressure are already weighing on hiring decisions. In other words, the labor market loses a shock absorber. This does not mean an immediate recession. But it does mean that future payroll reports will be far more sensitive to private sector weakness, and far less forgiving. Markets that have been comforted by “resilient jobs data” may need to reassess what is actually driving those numbers, and what happens when that driver goes into reverse. Source: US Labor Department

Wages have been growing faster than inflation for almost a year. Many workers still might not believe that because the opposite was true for nearly two years when inflation significantly outpaced wage growth. While the labor market cools, wage growth remains above pre-pandemic trends. The highest wage growth comes from young workers who are more likely to switch jobs and careers and workers at lower wages who are benefiting from minimum wage increases and high demand for workers from employers. Most salary budget surveys indicate employers are planning salary increases of about 4% this year, above the 20-year pre-pandemic average of 3%. Higher pay raises could help workers regain some purchasing power if inflation continues to decline through 2024, as expected. #labormarket #economy #economicoutlook #economicnews #hiringtrends #wages #inflation #wagegrowth #compensation #salarytrends

A few key points about the outlook for US wage growth from this morning's JOLTS and NFIB data releases. 1) Job openings increased quite a bit in September and October compared to August, and are staying slightly above pre-COVID levels. NFIB job openings have also been steady in recent months. 2) Quits, on the other hand, are falling rapidly. 3) The NFIB survey showed a decline in actual compensation growth, but also a sharp increase in planned compensation changes. In general, the data seem consistent with a continued moderation in wage growth. Job openings are up, but so is unemployment, and the large drop in quits sends a powerful signal that employees have less bargaining power. We'll get a read on Q3 wage growth from the Employment Cost Index (ECI) tomorrow morning. From a bond market perspective, Fed policymakers want to see ECI growth near 3.5% to be confident that wages are consistent with target inflation.

The workforce is growing again, boosted by a surge of immigration and workers finally enticed off the sidelines by high wages, but productivity remains stuck. In the latest Labor Market Outlook from The Burning Glass Institute, Chief Economist Gad Levanon looks under the covers of the surprising strength and worrisome future of the American labor market to uncover important insights: -         Demand for workers seems unquenchable but much of the growth is in low-wage jobs and is driven by high consumer spending in the few sectors that are still recovering from the pandemic. What happens when consumers finally run out of spare cash and those sectors return to full strength? -         Labor force participation among 25-54 year olds has surpassed pre-pandemic levels but, in an aging America, participation of workers 55+ is stuck at where it bottomed out during the pandemic -         The intersection of weak economic growth with robust job growth has resulted in disappointingly low labor productivity growth – well below that following recoveries from past recessions. The inability to ramp up production without adding more workers contributes significantly to ongoing labor shortages. Will new technology advances like LLM’s finally shift the curve? -         Job switchers continue to get larger raises than those who stay with their same employer, but the gap has been cut in half in the past year. -         Wage growth for blue-collar workers continues to outstrip that for management and professional workers. #economy #economics #jobs #humanresources #futureofwork #work Read our latest Quarterly US Labor Market Outlook to learn more! https://lnkd.in/ee6VJe6f