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Why “Average” Wage Rates May Be Misleading

Much has been made of Fed Chair Janet Yellen ‘s stance that the labor market still has a lot of slack. That message remained in the Fed’s September communique. As part of her justification, the Chairwoman points to the fact that the average hourly wage rate has remained at or near the “official” rate of inflation, and, therefore, real wage rates have been stagnant. The September jobs report, while showing considerable labor market strength. Yet, the financial markets attached an unusual amount of emphasis to the penny decline in the September “average” hourly earnings report (from $24.54 to $24.53 for all employees in the private sector). So despite the report’s underlying strength showing net new jobs of 248,000 (July and August’s jobs were also revised upward), the market’s are hoping that this one indicator will keep the Fed on hold with regard to interest rates.

Labor Market Indicators

While we do not know all of the dashboard indicators of labor market conditions used by Yellen and the FOMC, here is what we do know:

The traditional unemployment rate, U3, is down from 10.0% in October ‘ 09, and 7.2% a year ago to 5.9% in September,

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