On Friday, we will see the first labor market data for 2023. Along with the latest on payroll employment, unemployment, and wage growth, we will also get the final benchmark revisions for the establishment survey (CES). Preliminary benchmark revisions suggest job growth will be even stronger over the last two years than the 11.2 million previously reported. These benchmark revisions will be wedged back from April 2021 through March 2022, with the entire revision raising (or lowering) the level of jobs in March 2022 and consequently affecting subsequent job levels.

The Bureau of Labor Statistics (BLS) will also revise their industry classification system, which will result in about 10% of employment reclassified into different industries (mainly impacting detailed retail and information sectors). Friday’s jobs report will also include new population controls based on Census estimates for the household survey (CPS).

In addition to these important survey changes and annual benchmarking, the jobs report will show us where the economic recovery from the COVID-19 recession stands at the beginning of 2023. Taken together, the last two years of payroll employment growth have been remarkable. As shown in Figure A, the two years of job growth were the best in nearly 40 years.

This rapid recovery was not luck. Instead, it is the direct result of historic relief and recovery measures that matched the scale of the problem, like President Biden’s American Rescue Plan (ARP), which provided an essential boost with continued enhanced unemployment insurance benefits, aid to state and local governments, and the expanded Child Tax Credit.

2021 and 2022 were banner years for providing job opportunities across the U.S. workforce. As shown in Figure B, the average annual unemployment rate for high school graduates (with no college) dropped 5.0 percentage points over the past two years—by far the fastest drop on record (this series only goes back to 1992). While much good has been done to help these workers in other important legislative efforts—such as the Infrastructure Investment and Jobs Act and the Inflation Reduction Act—I cannot overstate the impact of the recovery measures in supporting workers across the board, particularly those hit hardest in recessions.

Monthly data reveal the extent to which high school graduates experienced a steep fall in unemployment after the pandemic recession. As illustrated in Figure C, the unemployment rates across all levels of educational attainment in December 2022 was at least as low as their pre-pandemic unemployment rates. A similar historically fast recovery can be seen in trends by race and ethnicity. This is no natural consequence of the business cycle. These changes were driven by intentional policy decisions.

While the recovery has been strong, a recession triggered by the Federal Reserve raising interest rates too high remains a pressing concern. With inflation easing and wage growth decelerating, the Federal Reserve should stand pat on further interest rate hikes.

As shown in Figure D, nominal wage growth decelerated in December no matter how it’s measured. Annualized wage growth between November and December was 3.4%. Not only does this illustrate that wage growth is decidedly not driving inflation, but it also shows that wage growth is coming down without sacrificing low unemployment and a strong labor market. Unnecessarily raising interest rates too high, too fast will lead to a recession, which will disproportionately harm those workers who gained the most in the last two years of the policy-driven labor market recovery.

Understandably, some might find it puzzling that we’re expressing some approval of a slower pace of nominal wage growth relative to the first half of 2022. However, when it comes to the living standards of workers, we care about real (inflation-adjusted) wages, not nominal wages. If the Federal Reserve is determined to restore the 2% inflation that (roughly) prevailed before the COVID-19 pandemic, the best-case scenario for this restoration is a deceleration of nominal wage growth accompanied by an ever-faster deceleration of inflation. This is exactly the pattern that has prevailed over the last half (and especially the last quarter) of 2022 (as shown in Figure E).

Going into the first jobs day of 2023, we’ve seen historically strong job growth over the last two years and low unemployment. Nominal wage growth has been decelerating (though slower than inflation). It looks like the economy can have a soft landing—if the Fed doesn’t stand in the way.