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Americans Are Finally Getting a Pay Raise

November 6, 2015, 3:26 PM UTC
Labor Market Shows Improvement In June Reports
MIAMI BEACH, FL - JULY 05: A ''Now Hiring'' sign is seen in the store front window on July 5, 2012 in Miami Beach, Florida. The ADP released the National Employment Report which showed that employment in the U.S. nonfarm private business sector increased by 176,000 from May to June on a seasonally adjusted basis.The government will release its closely watched employment report for June on Friday. (Photo by Joe Raedle/Getty Images)
Photograph by Joe Raedle — Getty Images

Friday’s jobs report was an upside surprise, with job growth surging, the unemployment rate falling, and most important, average hourly earnings rising at twice as fast as economists had expected they would.

Average per-hour pay increased rose 9 cents to to $25.20, which brought the year-over-year increase in hourly pay to 2.5%. A year ago, average hourly pay was rising just 2%, and so this dynamic gives evidence to Janet Yellen and Federal Reserve’s theory that as the unemployment rate falls, wage growth will start to pick up more quickly.

As Jim O’Sullivan, Chief Economist with High Frequency Economics, wrote in a note to clients, these wage increases are one of the more salient bits of data in the report. Referring to Janet Yellen and the Federal Reserve’s desire to raise interest rates starting in December, O’Sullivan writes, “The case for tightening in December–and a lot more in 2016–looks increasingly strong.”

Of course, Yellen will be looking at other economic indicators as well. Even if wages have been rising there still is no sign of overall inflation inching towards the Fed’s 2% target. Furthermore, we’ve seen false starts in wage growth that end up being noisey data rather than the start of a trend.

As you can see from the above chart, wage growth has remained remarkably unremarkable even as the unemployment rate has fallen precipitously. One theory as to why this is the case is that there is more “slack” in the labor market than a 5% unemployment rate would suggest. That’s because there are more working-age Americans today with part-time jobs, who want to be working full time, or who have dropped out of the labor market altogether than there have been in generations.

But today’s jobs numbers had brought good news on this front too: over the past two months, the number of “involuntary” part-time workers fell by about 700,000. This is a number that Yellen says she looks at closely, and only bolsters the argument for raising rates at the Fed’s December meeting.