Is Wage Slowdown Just a Statistical Illusion? NAIRU Constraint Remains, Fed's High Rates Far From Over

How tight is the US labor market really? This assessment directly influences the Federal Reserve's interest rate path, yet current data presents contradictory signals.

The unemployment rate remains low, and new initial jobless claims hover near historic lows. These "hard data" points indicate that the job market remains tight. However, at the same time, wage growth has continued to slow to levels approaching those seen before the pandemic, casting doubt on this assessment.

Some analysts believe that the cooling in wages may stem from structural distortions in statistical metrics. After excluding specific industries, wage growth is actually stable or even showing a slight rebound. This suggests that the upward pressure on inflation from the labor market may not have dissipated, thereby providing stronger fundamental support for the Federal Reserve's "higher for longer" interest rate stance.

This week, the Federal Reserve, the Bank of England, and the Bank of Japan held their respective monetary policy meetings. Investors have already assessed the probability of a Fed rate hike in July as "close to fifty-fifty," with bond markets showing significant pricing in response. Against the backdrop of persistent high oil prices and inflation remaining stubbornly more than one percentage point above the Fed's 2% target, the trajectory of the labor market has become a key variable shaping policy expectations.

Unemployment Rate and Claims Data: The Job Market Remains Tight

The core argument supporting a tight labor market comes first from the trend in the unemployment rate. The US unemployment rate remains low and has been declining continuously since last December, still significantly distant from the Federal Reserve's estimated Non-Accelerating Inflation Rate Of Unemployment (NAIRU) of approximately 4.5%.

Torsten Sløk, Chief Economist at Apollo Global Management, pointed out that the US unemployment rate has remained below the Fed's NAIRU estimate for nearly five consecutive years. He wrote, "The labor market has been operating in a zone of excess demand for an unusually long period. This persistently tight state is a significant reason why inflation remains high—when the unemployment rate is below the NAIRU, wages and prices face continuous upward pressure." Sløk thus concluded: A strong economy is the root cause of persistently high inflation, and only by adhering to "keeping rates higher for longer" can the Federal Reserve bring inflation back to its 2% target range.

New initial jobless claims, regarded as the most reliable "hard data" on employment, also corroborate this view. Current claims remain close to 200,000 per week, situated in a historically low range. This aligns with non-farm payroll survey data—since 2026, the US has added an average of about 90,000 jobs per month, and the labor force participation rate for prime-age workers has also remained at historic highs.

Retail sales data should not be overlooked either: over the past five months, retail sales accelerated month-over-month in four of those months, with consumer resilience further evidencing the strength of economic demand.

Continuous Cooling in Wages: The Biggest Crack in the "Tight Job Market" Narrative

However, one data point clearly contradicts the aforementioned "tight" narrative—the continuous decline in wage growth. Current wage growth has fallen back to levels near those before the pandemic, creating an internal contradiction with the judgment that "the job market is tight enough to push up inflation."

Meanwhile, several survey based datasets also depict a weaker employment picture, including results from the Conference Board, the Institute for Supply Management (ISM), and the National Federation of Independent Business (NFIB).

Nevertheless, Kevin Gordon, a strategist at Charles Schwab, questioned the credibility of the survey data. He argued that since the pandemic, the "sentiment perceptions" reflected in business and household surveys have fluctuated greatly, and the historical correlation with official hard data has clearly broken down. When the two diverge, priority should be given to the hard data.

Even setting aside the controversy over survey data, the structural contradiction between continuous wage cooling and a tight job market continues to puzzle market analysts and Federal Reserve officials.

Statistical Illusion? Drag from Private Education and Healthcare May Be the Key Variable

Addressing this contradiction, Matt Klein from the economic analysis publication The Overshoot proposed a noteworthy explanation: in official data, wages for workers in the private education and healthcare sectors have seen a significant and difficult-to-explain sharp decline, and this category accounts for a considerable proportion of overall employment.

If workers in these sectors are excluded, the overall wage trend presents a completely different picture—growth either remains stable or even shows a slight rebound. This analysis suggests that the apparent conclusion of "broad-based wage slowdown" may be largely a statistical illusion caused by structural drag from specific industries, and may not accurately reflect the actual temperature of the overall labor market.

If Klein's analysis holds, it means that the upward pressure on inflation from the labor market has not receded as much as the aggregate wage data suggests, which would further support the necessity for the Federal Reserve to maintain its tightening stance. Currently, considering hard data indicators such as the unemployment rate and claims data, the judgment that the labor market remains tight still slightly prevails—but given the internal contradictions in the data, uncertainty regarding the Federal Reserve's policy path remains significant.