US labor market is giving the Fed what it wants: Low unemployment and slower wage growth

Wages only rose by 0.3% and the unemployment rate is at its lowest rate since September

Photo: John Gress (Reuters)
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The December US jobs report was in the goldilocks zone for the Federal Reserve, with the number of jobs climbing and wage growth slowing.

The US added 223,000 jobs last month, slightly above the expected addition of 202,000 jobs. The unemployment rate, meanwhile, fell to its lowest rate since September.

Hourly earnings rose by 0.3% in December, a deceleration from the 0.4% rise it saw in November.

In the Labor Department’s final jobs report of 2022, the unemployment rate fell from 3.7% to 3.5% as the household survey began to catch up with the establishment survey. The establishment survey covers 131,000 businesses and government agencies that make up 670,000 worksites, while the household survey only reaches 60,000 households. The household survey determines the unemployment rate while the establishment survey determines how many jobs are added month to month.

Previously, it had seemed like the household survey might be showing weakness in the labor market. But this fear seems less credible now that the household survey shows growth of more than 700,000 jobs in December.

Additionally, the job growth numbers for October and November were revised down by 28,000 in the latest report.

The Fed doesn’t need to crush labor

One of the Fed’s justifications for raising interest rates in recent months
has been that incomes adjusted for inflation are falling, notes Skanda Amarnath, executive director at employment research organization Employ America. This was true from late 2021 until the summer of 2022, but real incomes have recovered as inflation has declined—which has pulled up consumer confidence data.

If the Fed keeps aggressively hiking rates, says Amarnath, its raises will begin to look punitive rather than helpful.

“It puts them in an awkward place of saying, ‘Yeah you’ve got too much of a good thing in terms of wage growth, and even though it’s posing no immediate inflationary pressure, we’ve got to put the foot firmly on the brake,’” Amarnath says.