Is the slowdown in wages just a statistical illusion? The NAIRU constraint remains unsolved, and the Federal Reserve’s high interest rates are far from over

How tight is the US labor market, really? The answer directly determines the Federal Reserve's rate path, yet current data presents conflicting signals.

Low unemployment and new jobless claims hovering near historically low levels—these "hard data" points show the job market remains tight. At the same time, however, wage growth has steadily slowed to nearly pre-pandemic levels, casting doubts on the above assessment.

Some analysts believe the cooling in wages may stem from structural distortions in statistical measurement. Excluding certain industries, wage growth is actually stable or has rebounded slightly. This suggests that upward pressure on inflation from the labor market may not have dissipated, giving the Fed’s "higher for longer" interest rate stance even stronger fundamental support.

This week, the Federal Reserve, Bank of England, and Bank of Japan are all holding policy meetings. Investors have already assessed the probability of a July Fed rate hike as "almost a 50/50 chance," which is clearly reflected in bond market pricing. With oil prices staying high and inflation stubbornly above the Fed’s 2% target by more than a full percentage point, labor market trends are a key variable shaping policy expectations.

The core arguments for a tight labor market come first from the unemployment rate trend. US unemployment remains low and has been trending downward since December last year, still some distance from the Fed’s estimate of the "Non-Accelerating Inflation Rate of Unemployment" (NAIRU), about 4.5%.

Apollo Global Management chief economist Torsten Sløk points 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 operated in excess demand territory for an unusually long time. This persistent tightness is a key reason why inflation remains elevated—when the unemployment rate is below NAIRU, both wages and prices face ongoing upward pressure." Sløk concludes: A strong economy is the root of stubborn inflation, and only by keeping rates higher for longer can the Fed push inflation back to its 2% target range.

New jobless claims, seen as the most reliable "hard data" on employment, also support this view. Current claims remain around 200,000 per week, close to historical lows. This echoes the nonfarm payroll survey data—since 2026, the US has added an average of about 90,000 jobs per month, and the prime-age labor force participation rate also remains at historical highs.

Retail sales data should not be ignored either: over the past five months, retail sales have posted month-on-month acceleration in four months, with consumer resilience further supporting robust demand in the economy.

However, one data point is at odds with the "tightness" narrative—the ongoing slowdown in wage growth. Current wage growth has fallen back to near pre-pandemic levels, which is internally inconsistent with the idea of a job market tight enough to drive inflation.

Meanwhile, various survey-based data also paint a weaker employment picture, including surveys by the Conference Board, Institute for Supply Management (ISM), and National Federation of Independent Business (NFIB).

However, Charles Schwab strategist Kevin Gordon questions the credibility of survey data. He argues that since the pandemic, the "sentiment perception" reflected in both corporate and household surveys has fluctuated dramatically, with historical correlations to official hard data clearly breaking down. When these diverge, hard data should be trusted first.

Even if the debate over survey data is set aside, the structural contradiction between steadily cooling wages and a supposedly tight job market continues to puzzle market analysts and Federal Reserve officials alike.

Addressing this contradiction, Matt Klein of economic analysis publication The Overshoot offers a notable explanation: in official data, there has been a significant and hard-to-explain drop in wages for workers in private education and healthcare, sectors that make up a considerable portion of overall employment.

If these industries are excluded, wage growth overall looks very different—either remaining steady or even picking up slightly. This analysis suggests that the apparent conclusion of "broad wage slowdown" may, to a significant extent, be a statistical illusion caused by specific sectoral drags, and may not accurately reflect the actual temperature of the overall labor market.

If Klein's analysis is correct, it would mean upward pressure on inflation from the labor market has not faded as much as headline wage data suggests, further supporting the Fed’s need to maintain a tighter stance. For now, considering hard data such as the unemployment rate and claims figures, the case for a tight labor market still holds a slight lead—but given inherent data contradictions, uncertainty over the Fed’s policy path remains significant.