The development in the US labour market in 2015 was a main reason why the Fed increased the Fed funds rate at its December meeting. Besides that the Fed would very much like to see PCE core inflation picking up, the development in the US labour market will be a key determinant for the Fed's hiking pace this year. We estimate non-farm payrolls increased 200,000 in December in line with recent trend, while in our view the unemployment rate is likely to have been unchanged at 5.0%. We estimate that average hourly earnings (AHE) grew 0.2% m/m in December, implying an increase in the annual growth rate from 2.3% y/y in November to 2.8% y/y in December - the highest since June 2009. The annual growth rate in AHE is by nature volatile but still it is noteworthy that the annual growth rate in AHE has trended up in 2015, suggesting that the Phillips curve is still functioning well. We expect wage growth to continue trending up this year, as we expect the labour market to tighten further.
In our base case scenario, we think the participation rate will be fairly stable in coming years, as more people will return to the labour force and thus offset the downward pressure from the aging effect. In the medium term, when the labour market slack has vanished completely, we expect the participation rate to decline further due to the aging effect. This implies that we expect the labour force to grow in the range 100,000-150,000 per month over the next few years. The labour market would tighten as long as employment growth exceeds this. If we are right, the labour market should continue to tighten even if employment growth slows. We expect the unemployment rate to get below NAIRU early next year, which should boost wages and thus increase the underlying inflationary pressure further.
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