A labor market riddle

This week, economists will try to fit fresh inflation data into the riddle of the year-end labor market. To be successful, they’ll need to square the conflicts of the last jobs report: Strong hiring accompanied by rapid wage growth and slightly higher unemployment.

Healthy job gains

The first step in solving a riddle is to identify a common feature or pattern.

Topline data in October and November showed a wild swing in hiring. The Bureau of Labor Statistics reported that private and government employers created 227,000 jobs in November. The bureau revised its October data, which was affected by hurricanes, upward to 36,000 jobs from 12,000. 

The bureau also revised September job gains up by 32,000, to 255,000.

But if we look at only private-sector job gains for the last three months, there’s more consistency.  The ADP National Employment Report puts average monthly hiring at 163,000 jobs between September and November, compared to 138,000 private-sector gains for the BLS.

These two statistically representative and independent reads on the labor market suggest a solid pace of job gains as we close out the year.

Higher unemployment

This healthy rate of hiring is good news for the economy. Less comforting is another component of the BLS payrolls report, the unemployment rate, which edged up to 4.2 percent in November from 4.1 percent in October and September.

Over the course of 2024, the unemployment rate rose from 3.7 in January to a peak of 4.3 percent in July. Outside of the pandemic years of 2020 and 2021, you’d have to go back to February 2018 to see an unemployment rate above 4 percent. 

In late 2018 through 2019, the economy had gotten use to less than 4 percent unemployment. Now, as we turn the corner into a new year, unemployment looks to be reverting a bit closer to its historical average of 5.7 percent.

Faster wage growth

In the two years before the pandemic, low unemployment was accompanied by slow wage growth.  This condition was an artifact of the economy’s low inflation at the time.

Now, higher unemployment is accompanied by stronger wage growth. The BLS reported that wages grew 0.4 percent from October to November, and 4 percent from a year earlier. In the decade before the pandemic, growth in average hourly earnings ranged from less than 2 percent to slightly more than 3 percent.

This accelerated pay growth isn’t a one-time fluke caused by November’s hiring bounce. The payroll records of millions of individuals over the course of 12 months, as tracked by ADP’s Pay Insights report, also show strengthening pay growth. 

Year-over-year pay gains for people on the job for at least 12 months—job-stayers—rose to 4.8 percent in November from 4.7 percent in October, according to Pay Insights data. It was the first time in 25 months that pay growth for job-stayers had accelerated. Pay gains for people who switched jobs over the course of the past 12 months—job-changers—rose to 7.2 percent in November from 6.7 percent.

Job-changers are more sensitive to real-time labor market conditions, which suggests that there’s more tightness in the labor market than the unemployment rate implies.

My take

Here’s the riddle: Combine robust hiring, rising unemployment, and accelerated wage growth, and what do you get?

The answer is sticky inflation. Annualized inflation as measured by consumer prices rose in October to 2.6 percent, up from 2.4 percent in September.

The November Consumer Price Index due for release on Dec. 11 will tell us whether our recent run of falling inflation will continue or stall.

Wages aren’t triggering higher inflation, but they’re putting just enough pressure on prices to make it more difficult for inflation to fall from 3 percent or more to a more comfortable range of 2 percent to 2.5 percent.

The Federal Reserve’s dual mandate to promote maximum employment and stable prices is now pulling central bank policymakers in opposite directions. To keep labor market gains in check and unemployment from drifting higher, a Fed rate cut might be helpful. But to push inflation back toward the Fed’s 2 percent target, a rate pause—or even a rate hike—might be in order.

The riddle of 2025 is just beginning.

The week ahead

Tuesday:  ADP Research releases its quarterly Today at Work report. Our cover package goes in-depth on pay for leisure and hospitality workers, who have flipped the script on pay gains. There’s also compelling data on tipped wages, high-paying jobs, and the slowest month of the year for HR activity.

Wednesday:  The Bureau of Labor Statistics releases the Consumer Price Index.

Thursday: The prices that companies pay to manufacture goods usually plays second fiddle to the Consumer Price Index, but the November Producer Price Index will give us a peek at the future path of consumer inflation. 

Friday:  With the potential for tariffs under the incoming administration, it’s time to get a baseline read on import and export prices from the Bureau of Labor Statistics as we prepare for a possible shift in U.S. trade policy.