The U.S. economy added 165,000 jobs in October, and the unemployment rate fell to 4.1%, extending a stretch of hiring that has kept the jobless rate between 4% and 4.5% for two years. Unemployment claims dropped to a 57-year low, signaling a labor market that remains historically tight.
The bottom line: wage growth is not cooling fast enough to satisfy the Federal Reserve’s inflation target. By the numbers, incomes rose 3.1% over the past year while inflation ran at 3.7%, leaving the average worker with a real pay cut.
The Stayer-Changer Gap
The divide between workers who stay put and those who switch jobs widened further in October. Base pay for job-stayers increased 3%, according to ADP data covering private employers. Workers who changed jobs saw a 4.8% jump. Nela Richardson, ADP’s chief economist, said job-changers were lured by a combination of bonuses, overtime, and more hours on top of higher base pay, pushing earnings growth for that group to its fastest pace since March 2024.
Private employers added 86,000 jobs in October, per ADP. The government’s broader count of 165,000 exceeds the decade average of 123,000 new jobs per month. Investors will note that strong hiring alongside persistent inflation keeps the Fed on track to continue raising interest rates.
Sticky Norms, Lasting Losses
New research from the National Bureau of Economic Research, using administrative payroll records for 16 million workers at firms with 50 or more employees, shows why the gap persists. Before the pandemic, 89% of workers were at firms with a wage norm between 2% and 4%. During the 2021–2023 inflation surge, that share fell only to 76%. Most firms apply a single nominal raise to the majority of continuing workers, and that norm shifted only modestly even when annual inflation topped 7%.
The figure that matters: real wages fell and stayed depressed for more than one-third of workers after the inflation surge. Among workers continuously employed at the same firm from December 2020 through December 2024, 43% experienced a real wage decline; the average loss was about 9%. Even accounting for job-changers, whose nominal wages rose nearly one-for-one with inflation, 37% of all workers still saw cumulative real wage declines. Older workers bore the brunt — 55% of those aged 50 and older suffered a cumulative real wage drop, as they are less likely to switch jobs or receive large off-cycle raises.
What It Means for the Fed
The NBER researchers estimate that if firms had adjusted their modal raises one-for-one with inflation, it would have closed about 40% of the real wage shortfall relative to the pre-pandemic trend. Instead, sticky wage norms have left a hole in household purchasing power that job-switching alone cannot fill. With hiring running above trend and inflation outpacing the broad wage measure the Fed watches, the central bank has little reason to pause its tightening cycle.
Sources
- Wage growth
- ECB wage tracker suggests slightly higher wage growth in first three quarters of 2027 compared with the full year of 2026
- U.S. adds 165,000 jobs, but wage growth struggles to keep up with inflation
- Inflation and Nominal Wage Adjustment
- Year over Year Wage Growth – AAF
- Canadian wage growth slows in October, below forecast
Photo: Vitaly Gariev / Unsplash (Unsplash License)
