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US employment is up, wages are static. Ring any bells?

It seems just like the good old days. Almost 300,000 jobs were added to payrolls in America in the last month of 2015, continuing the upward trend of recent months. The US is once again living up to its reputation for being a gigantic jobs machine.

Well, perhaps. Jobs are certainly being created at a good lick and the US has an unemployment rate – 5% – that the eurozone, at 10.5%, would die for. There are signs that people who had given up hope of finding work are being encouraged back into the labour market.

Inevitably, this will lead to speculation that the Federal Reserve has left it too late to start raising interest rates and will be forced to play catch up with a more rapid increase in the cost of borrowing than Wall Street is expecting. There is already talk of the Fed repeating December’s rate hike in March.

The markets may be getting ahead of themselves. Employment and unemployment are lagging indicators: they provide a guide to what has happened to an economy in the past rather than what is happening now or what will happen in the future. Some of the forward-looking indicators – for manufacturing, for example – have been worryingly weak.

The Fed will certainly be looking closely at the rate of job creation in the US, but it is equally interested in what is happening to wages. And the story here is that pay pressures are muted. Average hourly earnings were flat in December and were up by just 2.5% over the year as a whole, a much weaker outcome than Wall Street had been anticipating. In this respect, the US and the UK are alike: employment is going up but wages are not, leaving policymakers scratching their heads about what to do next.


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