Yardeni Research | Sweet Spot For The Labor Market

💡April's employment report indicated labor market stabilization without boosting inflation as the economy added 115,000 jobs, exceeding consensus expectations for two consecutive months, while nominal wage inflation continued to moderate. Average hourly earnings (AHE) rose 3.6% year-over-year, but at a monthly annualized rate of just 1.9%, the weakest pace since June 2025 over the last three months, which acts as a disinflationary tailwind. This moderation, coupled with a Q1 unit labor cost growth of only 1.2%, the slowest since Q3 2023, confirms the labor market is not a source of inflationary pressure, supporting a non-inflationary vote of confidence for stabilization.

💡Retiring Baby Boomers significantly influence current wage moderation and employment figures by creating an arithmetic drag on average hourly earnings (AHE) growth. As higher-earning Boomers leave the workforce, their income disappears from AHE calculations, replaced by retirement income streams, while younger, lower-paid workers fill some positions. This compositional shift reduces the average wage even if individual wages for active workers remain unchanged, leading to slower measured nominal wage growth. Additionally, their retirements contribute to a decline in the labor force participation rate and slower payroll growth as more labor market activity focuses on replacing workers rather than creating new jobs.

💡Baby Boomer retirements arithmetically depress average hourly earnings (AHE) growth by altering the workforce's composition. Higher-wage Baby Boomers, on average, earn significantly more than younger workers. When they retire, their labor income—wages, salaries, and benefits—is removed from the AHE calculation. Simultaneously, the workers replacing them are generally younger and lower-paid. This process reduces the number of high-wage workers in the dataset and increases the relative weight of lower-wage workers, causing the average to decline even if individual wages for active workers do not change. This mirrors the pandemic effect, where disproportionate low-wage layoffs arithmetically lifted AHE.

💡The Earned Income Proxy (EIP) is being depressed by the retirement of Baby Boomers because their departure from the labor force means their high labor income is no longer factored into the calculation. While the EIP rose 0.6% month-over-month in April, nominal wage growth moderation due to Boomer retirements causes it to increasingly understate consumers' true spending power. This demographic shift, where high-earning individuals exit the workforce, implies that the EIP, like average hourly earnings, is subject to compositional effects that obscure the full picture of aggregate purchasing power, particularly as Boomers rely on accumulated wealth.

💡Consumer spending remains resilient despite slowing wage growth because Baby Boomers are drawing down their substantial accumulated wealth during retirement. The analysis indicates that Boomers possess record levels of wealth from appreciated assets like equities and housing. Although nominal wage growth moderates due to their departure from the workforce, their consumption of this wealth sustains spending. This phenomenon also places secular downward pressure on the personal saving rate, as retirees fund their consumption by utilizing their savings and investments rather than relying solely on current labor income, thereby decoupling spending from immediate wage growth.

💡The retirement of Baby Boomers significantly influences the labor force participation rate by creating a secular headwind. Since the labor force participation rate includes everyone aged 16 and older without an upper limit, retiring Boomers remain counted in the working-age population while no longer being employed or actively seeking work. This demographic shift caused the participation rate to drop to 61.8% in April, its lowest since September 2021, and the yearly percent change in the labor force to decline by 0.6%, the sharpest since March 2021. This decline is evident in the accelerating decrease of participation rates for those aged 65 and older.

💡Baby Boomer retirement is increasing in intensity, as indicated by the accelerating decline in the labor force participation rate for those aged 65 and older. This demographic segment's participation rate has been steadily decreasing, with a noticeable pick-up in the pace recently. This intensification is partly driven by the significant increase in wealth accumulated by Baby Boomers, particularly through appreciation in asset prices like equities and housing, which enables more individuals to retire. Conversely, the labor force participation rate for prime-age workers (25-54 years old) has remained historically high, highlighting the distinct impact of Boomer retirements.

💡The removal of the easing bias from the Federal Reserve's policy statement appears increasingly appropriate. The April FOMC meeting, which held policy rates unchanged, saw four dissents, the most in 34 years. Three of these dissenters—Hammack, Kashkari, and Logan—advocated for eliminating the easing bias, signaling that the next policy move is as likely to be a hike as a cut. Additionally, Boston Fed President Susan Collins has joined this chorus, stating a preference for language that is agnostic about the direction of the next step. This shift reflects a growing consensus that risks to the Fed's dual mandate are balanced.

💡Four FOMC members dissented at the April meeting regarding the easing bias due to differing views on future monetary policy direction. Governor Miran voted for a 25-basis-point rate cut, indicating a more dovish stance. In contrast, Hammack, Kashkari, and Logan pushed for the removal of the easing bias from the policy statement entirely. Their dissent signaled that they believe the next move is equally likely to be a rate hike as a cut, advocating for a more neutral communication stance. This significant number of dissents, the most in 34 years, underscores the growing internal debate about the appropriate forward guidance.

💡Incoming Fed Chair Kevin Warsh's tenure might begin with a challenging effort to maintain the easing bias. The debate has shifted from advocating for aggressive rate cuts, as desired by President Trump, to preventing the removal of the easing bias from the policy statement. Support for removing this bias will likely grow at the June FOMC meeting if incoming data continues to show a resilient labor market and elevated inflation risks, conditions confirmed by the April jobs data. Warsh may find it difficult to hold the line on the easing bias at his first meeting, potentially leading to a rough start in fulfilling presidential expectations.