Wage slowdown is statistical illusion, giving Fed 50-50 rate-hike odds

US wage growth has slowed to near pre-pandemic levels, but the decline may be a statistical distortion from education and healthcare — leaving the labor market tight enough to keep the Fed's rate path tilted toward a hike.

"The headline wage numbers are misleading because of an unexplained plunge in private education and healthcare pay," said Matt Klein, an economist who publishes The Overshoot newsletter. "When you strip those out, wage growth is either flat or slightly accelerating."

The unemployment rate has run below the Fed's estimated non-accelerating inflation rate of unemployment of about 4.5% for nearly five years, according to Apollo Global Management Chief Economist Torsten Sløk. Initial jobless claims remain near 200,000 a week, a historically low level that signals persistent labor demand. Nonfarm payrolls have averaged about 90,000 a month since the start of 2026, while prime-age labor force participation holds near record highs. Retail sales accelerated in four of the past five months, pointing to resilient consumer demand.

If Klein's analysis is correct, the inflation pressure from the labor market has not faded as the headline wage data suggest. That gives the Federal Reserve a stronger case to keep rates elevated — or even raise them. Investors are pricing a near 50-50 probability of a quarter-point hike at the July 28-29 meeting, according to federal funds futures. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have both expressed openness to higher rates, raising the possibility of dissents if officials opt to hold steady.

The NAIRU Gap Persists

The unemployment rate has run below the Fed's estimated NAIRU of about 4.5% for nearly five years, Apollo's Sløk noted. "The labor market has been operating in excess demand territory for an unusually long time," he wrote. "This persistent tightness is a key reason inflation remains elevated — when unemployment is below NAIRU, wages and prices face sustained upward pressure." Sløk concluded that strong economic growth is the root cause of sticky inflation, requiring the Fed to maintain restrictive policy for longer.

Initial jobless claims, widely considered the most reliable real-time labor market indicator, remain near 200,000 a week — a historically low level. That aligns with the payrolls data: the US has added about 90,000 jobs a month on average since the start of 2026, with prime-age labor force participation holding near record highs.

Survey Data vs. Hard Data

The wage-growth slowdown is the biggest crack in the tight-labor-market narrative. Average hourly earnings have decelerated to near pre-pandemic levels, creating an apparent contradiction with the unemployment and claims data. Survey-based indicators from the Conference Board, the Institute for Supply Management, and the National Federation of Independent Business all paint a softer picture of the labor market.

Charles Schwab strategist Kevin Gordon has questioned the reliability of survey data, arguing that the pandemic broke the historical correlation between business and household surveys and official hard data. When the two diverge, he said, hard data should take precedence.

The distortion identified by Klein offers a potential resolution. Private education and healthcare employment carries significant weight in the overall jobs tally, and the unexplained wage decline in those sectors may be dragging down the aggregate figure. Excluding them, wage growth is either stable or modestly accelerating — a pattern consistent with a labor market that remains too tight for the Fed's comfort.

Forward Outlook

The July 28-29 meeting will test whether Chair Kevin Warsh can maintain consensus. Logan and Hammack, both voters on the Federal Open Market Committee this year, have publicly argued for higher rates. Fed Vice Chair Philip Jefferson said after the June CPI report that "it could be appropriate to reconsider our current policy stance" if inflation does not cool soon. The last time the Fed faced this level of internal dissent over a rate decision was in 2023, when a divided committee ultimately held rates steady before delivering a final quarter-point hike later that year. The central bank's last policy move was a half-point cut in September 2024, and it has held rates steady for four consecutive meetings since.

If the statistical-illusion thesis gains broader acceptance among policymakers, the probability of a July hike could move beyond 50-50, with implications for bond yields, the dollar, and risk assets globally.

This article is for informational purposes only and does not constitute investment advice.