Does brisk wage growth explain why inflation remains above pre-pandemic rates?
Core argument: The prime-age (25–54) employment-population ratio was 80.6% in November, up slightly from 80.4% in March 2025, and has been stable since reaching a multi-decade high of just under 81% in early 2023.
Lowering interest rates could make sense if the job market were clearly in danger of rolling over. As of this writing, however, the job market still looks relatively healthy, or at least no less healthy than it did a few months ago. The headline unemployment rate (U-3) rose from 4.44% of the labor force in September to 4.56% in November. [However], the rise in unemployment since March 2025 has coincided with a rise in the share of people saying that they are actively looking for a job, rather than a decline in the proportion of people who are gainfully employed. The share of Americans aged 25-54 with a job was 80.6% in November, up slightly from March 2025, when the “prime age” employment-population ratio was 80.4%. In fact, the share of Americans aged 25-54 with a job has been remarkably stable since hitting its multi-decade high of just under 81% in early 2023. The typical American worker’s wages have consistently been rising about 4% a year since early 2023, compared to about 3% a year in 2018-2019 - large enough to explain why inflation is still running about 1pp faster than before the pandemic. The data imply that the burden for loosening policy should be high, especially given the latent risk [of] inflationary policy shocks.