The puzzle of wage increases and low salary growth rates
Economists are grappling with a puzzling issue. Why is it that wage growth has remained robust despite sluggish employment growth?
By 2025, the U.S. economy is projected to have only 181,000 employees on payroll, a figure that seems quite underwhelming compared to previous years. Yet, nominal wages saw a notable increase of 3.8% across the economy, and even more—4.3%—in manufacturing. The recent jobs report for March was unexpected, showing 178,000 jobs added instead of the anticipated 59,000. Meanwhile, the unemployment rate dropped to 4.3%.
Some economists express concern over a weakening labor market, attributing this to the Federal Reserve’s strict monetary policies. But I think they might be missing the broader picture. If the labor market were genuinely weak, we’d likely see considerably lower wage growth and a rise in unemployment.
This contradiction has led numerous analysts to label the economy as “frozen,” paralyzed by uncertainty. Critics of President Trump’s policies blame his tariffs and tensions with Iran, but that reasoning also seems off the mark.
In our perspective, key economic indicators have been misinterpreted, largely due to outdated analytical models that assume labor force growth. While labor force population is stable, it could potentially decline.
Reading the economy with outdated maps
Historically, America’s workforce expanded annually after World War II, without much scrutiny on labor force growth assumptions. It’s like the fish that doesn’t notice the water. When we mention “the economy added 181,000 jobs,” it reflects a mindset tailored to a world teeming with labor. This phrase implies that employers are hiring to meet strong demand for a growing group of workers. That model may have worked for a century, but it no longer applies.
Since President Trump began implementing immigration laws, we’re seeing an intentional reduction in the workforce. Estimates from the Dallas Fed predict a net loss of 548,000 unauthorized workers by 2025. According to the Department of Homeland Security, around 3 million people have exited the U.S., including about 800,000 who were forcibly returned and 2.2 million who left voluntarily.
Recently, the Fed’s board staff acknowledged the implications of these figures. In a new FEDS note, economists Seth Murray and Ivan Vidangos pointed out that the labor force growth rate in 2026 could approach zero, with new available workers increasing by less than 10,000 per month—an unprecedented figure in the past 65 years. Their analysis indicates that while the economy might lose 100,000 jobs in a month, this wouldn’t necessarily mean a downturn; around zero becomes typical noise.
Increase in salary does not mean increase in employment
We need to reassess key concepts. What the BLS releases every month on “Job Friday” isn’t really about “job growth.” It’s about net payroll growth, which measures employees minus those leaving their positions. In an era when labor supply was rising, the distinctions didn’t matter much. When payroll increased by 250,000, it indicated strong demand.
But when supply turns negative, the dynamic changes. The net figure then reflects two opposing forces. Even if a company is hiring vigorously, high turnover can still push salaries down. Hiring involves time-consuming processes like posting ads and interviews, whereas departures—especially deportations—happen immediately. Thus, during months when departures spike, payroll figures capture losses, but not the ongoing replacement work.
This means the net addition of 181,000 jobs in 2025 isn’t solely about demand. It reflects the remnants after losses across millions of jobs. Actual hiring efforts, including interviews, were undoubtedly higher than the headlines indicate. This explains why wages surged despite the perception of weak employment growth—companies are fiercely competing for a smaller talent pool. Wage data mirrors the labor market reality companies are experiencing.
Manufacturing: the clearest case
Manufacturing employment saw a decline of around 89,000 between April 2025 and February 2026. Critics cited this decline as evidence that tariffs were negatively impacting U.S. manufacturing. However, about 11 percent of what’s referred to as the “unauthorized workforce” works in manufacturing. If we apply that percentage to the 3 million departures, it suggests 300,000 manufacturing jobs may have been lost, indicating that the labor force shrinkage is nearly four times what was reported.
If this reasoning holds, the sector could potentially have added over 200,000 replacements or newly qualified workers while the media reported a contraction. This helps clarify why manufacturing wages rose even as total employment numbers appeared to decline, alongside production seeing a 4.76% increase and capital investments rising by 9.55%. These statistics don’t signify decline but rather adaptation under new conditions.
Misdiagnosis of “low recruitment, low firepower”
There seems to be a prevailing narrative that the current labor market is characterized by “low employment, low fire”, implying some kind of inactivity. But it’s apparent that employers are actively hiring millions to replace those who have left the workforce, whether due to retirement or emigration. It seems employment numbers are low not because of weak demand but due to a shrinking talent pool.
Layoffs are quite rare. Recently, the four-week rolling average of new unemployment claims arrived at 207,750, the lowest recorded since 1967. Perhaps some companies that were considering layoffs found their workforce diminished without needing to issue pink slips, thanks to departures. Workers who are deported don’t typically file for unemployment insurance, which skews the claims data. If we exclude policy-driven retirements, the security for remaining workers might be better than it appears.
That said, this shift isn’t without its costs; those retirees were also consumers, and their absence impacts spending patterns rapidly. Capital investment, productivity growth, and alternative employment have kept productive capacities intact, yet the customer base has contracted, particularly in sectors catering to low-income and immigrant demographics. This shift creates real disinflationary pressure that the Fed needs to consider.
However, before evaluating if the trade-off is worthwhile, we must grasp the actual functioning of the economy. Currently, most people have a limited understanding. A single variable—the labor supply—has shifted from a permanently positive to a negative state, challenging established interpretations.
The reversal in immigration has altered the data’s significance before economists could adapt their analytical frameworks. Until this adjustment occurs, most conclusions drawn from current headline figures are likely to be inaccurate.
