Is the slowdown in wages just a statistical illusion? The NAIRU curse remains, and the Fed's high interest rates are far from over

How tight is the U.S. labor market? This assessment directly determines the Federal Reserve’s interest rate path, but current data presents conflicting signals.

The low unemployment rate and the number of new jobless claims lingering near historical lows — these “hard data” indicate the labor market remains tight. At the same time, however, wage growth has continued to slow, returning to levels near the pre-pandemic era, casting doubt on this judgment.

Some analysts believe that the cooling in wages may stem from structural distortions in statistical methods. Excluding specific industries, wage growth has actually remained stable or even slightly rebounded. This means the upward pressure of the labor market on inflation may not have dissipated, and the Federal Reserve’s “higher for longer” interest rate stance has firmer fundamental support as a result.

This week, the Federal Reserve, the Bank of England, and the Bank of Japan are all holding monetary policy meetings. Some investors already assess the probability of a Federal Reserve rate hike in July as “almost 50-50,” with obvious pricing in the bond market as well. Amid the persistent pressure of high oil prices and inflation still stubbornly hovering more than one percentage point above the Federal Reserve’s 2% target, the direction of the labor market has become the key variable for policy expectations.

The core evidence supporting a tight labor market comes first from the trend in unemployment. The U.S. unemployment rate remains low and has steadily declined since last December, still a significant distance from the Federal Reserve’s estimated “Non-Accelerating Inflation Rate of Unemployment” (NAIRU) of about 4.5%.

Apollo Global Management’s Chief Economist Torsten Sløk notes that the U.S. unemployment rate has remained below the Federal Reserve’s NAIRU estimate for nearly five consecutive years. He writes, “The labor market has been operating in an excess demand zone for an extraordinarily long time. This persistent tightness is a key reason inflation has stayed elevated — when unemployment is below NAIRU, wages and prices will face ongoing upward pressure.” Sløk concludes that a robust economy is precisely the root cause of persistent inflation, and only if the Fed ‘maintains high rates for longer’ can it push inflation back to the 2% target range.

The number of new jobless claims, regarded as the most reliable “hard data” on employment, also corroborates this narrative. Current claims remain close to 200,000 per week, hovering at historically low levels. This aligns with nonfarm payroll survey data — since 2026, the U.S. has added an average of around 90,000 jobs per month, and the prime-age labor force participation rate remains at record highs.

Retail sales data should not be ignored: In the past five months, retail sales accelerated month-on-month in four months, further demonstrating resilient consumer demand and corroborating the strength of economic momentum.

However, one data point stands in stark contrast to the “tightness” narrative—wage growth’s continued decline. Wage growth has now fallen back to near pre-pandemic levels, which is internally inconsistent with the argument that the labor market is tight enough to drive inflation higher.

At the same time, several survey-based data sources are painting a weaker employment picture, including results from the Conference Board, ISM, and the National Federation of Independent Business (NFIB).

Nonetheless, Charles Schwab strategist Kevin Gordon has raised doubts about the credibility of these survey data. He argues that since the pandemic, the “sentiment perceptions” reflected in corporate and household surveys have fluctuated dramatically, and the historical relationship with official hard data has clearly broken down. When the two diverge, hard data should be given priority.

Even setting aside the survey controversy, the structural contradiction between ongoing wage cooling and a still-tight labor market continues to perplex market analysts and Federal Reserve officials alike.

To address this contradiction, Matt Klein from the economic journal The Overshoot offers a noteworthy explanation: In official data, there is a pronounced and hard-to-explain drop in wages for private education and healthcare workers—a group with a significant share of total employment.

If you exclude workers in these sectors, the overall wage trend looks very different — growth is either steady or has even modestly rebounded. This analysis suggests that the apparent conclusion of “widespread wage deceleration” may, to a large extent, be a statistical illusion caused by sector-specific drags, and may not accurately reflect the real temperature of the overall labor market.

If Klein’s analysis holds true, it means the labor market’s upward pressure on inflation has not faded as much as the headline wage data suggests, further supporting the need for the Fed to maintain a tightening stance. For now, considering hard data indicators like the unemployment rate and claims data, the conclusion that the labor market remains tight is still modestly dominant — but given the underlying data contradictions, uncertainty around the Federal Reserve’s policy path remains significant.