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How Tight a Job Market Is Too Tight for the Fed?

A tight labor market is supposed to act like a check on the economy. So far this one isn’t.

Like so many jobs reports before it, Friday’s jobs report was good, but a bit mystifying. The economy tacked on a robust 228,000 jobs in November after adding 244,000 in October and the unemployment rate remained at a low 4.1%. Despite its strength, though, the job market is throwing off little heat: Average hourly earnings were up just 2.5% from a year earlier.

Quiescent wage growth isn’t enough to keep the Federal Reserve from raising rates when it meets next week, but it does give succor to policy makers who think the central bank ought not to tighten much next year. Why hold back the economy when the danger of inflation seems so low?

Yet, with the job market likely to continue to gain strength, arguing for restraint could become increasingly difficult. If the unemployment rate starts with a three, it will be hard for the Fed to sit on its hands.

Moreover, despite what is going on with wages, the job market really is looking tighter. A broader measure of unemployment that includes discouraged workers and other people who say they would take jobs if given the opportunity is at its lowest level since before the last recession, when wage growth was much faster than today. And the pace of job gains, while still strong, has been trending lower since 2015—an indication that companies really are having a harder time filling spots.

Surely there is some level of unemployment that, once reached, will push up wages more swiftly. Next year we will find out what it is.

Write to Justin Lahart at Markets

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