Economist Insights: Q3 2026-What Wages Will Buy

What do the latest economic indicators tell us about the labor market, and why do they matter? Economist Insights is a new quarterly series that breaks down complex economic data into practical insights for state workforce agencies. 

The labor market has stabilized and might be showing slight signs of strengthening – very slight. Each month has felt like a rollercoaster, with economic indicators bouncing up and down. However, the general trend recently is, at the very least, not negative. It may even be slightly positive. However, prices are still high, and wages cannot keep pace. This continues to reduce workers; purchasing power.

In a world of new and uncertain norms for breakeven employment growth, small statistical revisions can mean the difference between monthly net job gain and net job loss. The past few months averaged around 50k net job gain, but with lots of variation from month to month.

The fact that the unemployment rate (currently around 4.2%) has not dramatically risen recently indicates that these employment growth numbers might be okay to support our workforce in the short term. In other words, fewer employed workers are needed to maintain the same unemployment rate since there are fewer workers in general.

The bigger picture question is how the diminishing labor force and AI will interplay in the longer term to support our broader labor needs, particularly in healthcare as our population ages. There are numerous predictions. We will see how it plays out.

Real (adjusted for inflation) average hourly earnings have been barely holding on recently due to a combination of limited nominal (not adjusted for inflation) wage growth and larger increases in prices. The past few months have seen decreases in real average hourly earnings since the year before. Read more about real earnings in the Closer Look.

The Federal Reserve raised interest rates in September, which generally helps to bring inflation down. Some are pointing out that the high inflation we’re currently experiencing is driven by supply shocks. These include shortages and higher production costs. Raising interest rates, however, works through demand mechanisms, such as discouraging investment. As a result, higher interest rates may not be an ideal fix for this type of inflation. However, the Federal Reserve only has so many levers it can pull.

In terms of the labor market, while we are doing okay right now at a high level, we are definitely not flourishing and could still be susceptible to pressures from higher interest rates, particularly if more rate hikes are in the future. It will be important to keep an eye on openings and hiring in the coming months.

For now, job openings are looking okay with a possible upwards trend starting after a period of not much change. After a year sitting at a balanced labor market, the openings-to-unemployed person ratio or labor market tightness is also increasing. See more about job opening trends in the NLx Research Hub’s latest quarterly Cup of JOE blog post and subscribe to get notifications when new blog posts come out.

Hiring is bouncing around a lot this year but with no obvious trend either up or down.

For more detailed state-level data, please see the state’s LMI website.

Closer Look: Read the Full Report

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