Wage Growth Is Slowing as the Labor Market Cools. What It Means for Job Mobility.

The long-term unemployed, or those seeking work for more than 27 weeks, now account for 24% of all unemployed people. Above, a career fair in New York. (Spencer Platt/Getty Images)

Wage growth is slowing as 2025 draws to a close, which could signal financial struggles for more Americans in the new year. The deceleration comes as payroll growth is also falling, and in the absence of meaningful gains in hours worked. That suggests affordability will remain a pressing issue.

Average hourly earnings for all employees on private nonfarm payrolls grew by just five cents, or 0.1% in November, to $36.86, the Bureau of Labor Statistics recently reported. Wage gains measured 3.5% last month on an annual basis, down from 3.7% in September and 4.2% a year ago.

Annual wage growth peaked at nearly 6% in March 2022, in the aftermath of the Covid-19 pandemic.

Declining wage growth isn’t surprising, given growing weakness in the labor market. The U.S. added only 64,000 jobs in November, compared with 261,000 monthly gains a year ago, and the unemployment rate rose to 4.6% from September’s 4.4%. [The BLS didn’t survey households in October due to the government shutdown.]

Additionally, the November jobs report revealed that 1.9 million people had been looking for work for more than 27 weeks. Referred to as the long-term unemployed, this cohort represents 24% of all unemployed people, and has grown from a postpandemic low of 18% in February 2023.

Economists and Federal Reserve officials worried about inflation may welcome slower pay gains, but nominal wages are now growing below the 4% “sustainable” rate that economists estimate is consistent with 2% inflation, writes Jan Hatzius, chief economist at Goldman Sachs. While the labor market isn’t putting inflationary pressure on the U.S. economy, low wage growth stunts economic mobility and can reduce consumer spending, which accounts for roughly 70% of gross domestic product.

Wage growth is a key component of income growth, which fuels consumer spending, especially among lower- and middle-income households. Many higher-income households, which have also benefited in recent years from strong stock market returns and growth in real estate equity, have contributed a greater share of aggregate consumer spending.

Lower-income households have also been hurt disproportionately by persistently high inflation, which curbs spending power. The bifurcation has created a so-called K-shaped economy, with the letter’s upper arm representing more-affluent consumers, and the lower arm, those feeling greater financial pressure. If wage growth continues to decelerate, the gap could widen further, leaving the economy more vulnerable to shocks.

“This all signals that this [lower income] cohort of the population will face ongoing affordability challenges into the new year,” says Oren Klachkin, financial markets economist at Nationwide.

Many lower-income households also lack ample savings to ease financial stress. “Lower-income consumers generally have a harder time tapping possible credit lines, and [credit is] more expensive than for those with higher-paying jobs,” he says.

Lagging wage growth could weigh on job mobility. “If wage growth is cooling, then workers are likely going to be less inclined to quit one job to jump to another,” says Jeffrey Roach, chief economist for LPL Financial.

The quits rate, or the percentage of workers voluntarily leaving their jobs, was 1.8% in October, according to the Job Openings and Labor Turnover Survey. That is down from 2% a year ago and a peak of 3% in March 2022.

The decline in November’s wage growth could reflect seasonal factors. As companies hire seasonal workers at wages below the national average, that can bring the pace of wage growth down, says Mike Reid, senior U.S. economist for the Royal Bank of Canada.

The slowdown may ease in the first quarter, and higher tax refunds may mitigate concerns around longer-term spending.

Economists expect the labor market to firm in the second half of 2026 as policy uncertainty clears. That should help spur hiring and a modest reacceleration of wage growth. How quickly that would ease households’ financial burdens isn’t clear, however. It could take more time for the most stressed households to catch up, particularly if they have taken on more debt, which would prolong the affordability problem.

Write to Megan Leonhardt at megan.leonhardt@barrons.com