The latest jobs report was genuinely strong and better than expected. Employers added 165,000 jobs (against forecasts of around 60,000). The previous two months were revised up, and the unemployment rate dipped to 4.1%.
You can catch up on those numbers here:
Now it’s time for The Professor Is In, where my producer Augusta Chapman brings me the questions from the audience. Except this week I’m on the road taking my daughter to see colleges, so Augusta asked me questions of her own. Either way, think of this like office hours. The door’s open, come on in. And let’s let the conversation wander.
This week, we talked about paychecks.
Loyalty doesn’t pay
Workers who switch jobs tend to get bigger raises than those who stay put. Augusta suggested that this isn’t a healthy way to run an economy. Every move means retraining and relearning. But staying in place can hold back earnings. So do workers who stay have leverage?
Let me start with what’s hanging over this whole conversation. Of course, it’s AI. Many workers aren’t sure if their jobs will still exist in three or six or ten years. If you’re worried the computer is going to take your job, it’s probably not a great time to ask for a pay raise.
But if you’re the one revolutionizing workflows and saving your company a ton of money, you do have leverage, and that’s because expertise in using AI remains scarce. The literal advice I give friends and family: Become the best AI person at your company. You’ll be the last one fired.
My job is an extreme version
I teach at a large state university, the University of Michigan (Go Blue). Every year, the faculty get a raise that the school says is all about merit. Usually it’s around the inflation rate, plus or minus a percentage point. Once you’re promoted to full professor, that’s more or less it.
But if I walked in and said Princeton had offered me $50,000 more, the university would match it, probably by the end of the day. (Or they might tell me to go to New Jersey and not look back.)
So for me — as with many academics — the only way to get a real raise is with an outside offer. And that creates some weird incentives. I want to be a good University of Michigan professor, which means being loyal, present, and helpful to my students. Almost none of that is the stuff that makes another university want to hire me. If all I wanted was the biggest raise, I’d go to lots of conferences, network like hell, show off my latest research, stay quiet about my colleagues and students being pissed off at me, and mention to everyone that I’m really underpaid.
Augusta put her finger on the deeper problem here. The more you invest in your own organization, the lower your outside option. The most loyal workers can end up with the least leverage.
But it doesn’t have to be that way.
The resume on the photocopier
Many years ago, a girlfriend of mine who worked at a law firm accidentally left her resume on the office photocopier. She came home devastated, convinced she was going to lose her job.
Compare that with my own history as a young economist. Sometimes I’d go into the photocopier room and leave my resume there on purpose. Universities are big, bureaucratic organizations that give raises only when they feel they have to, and I wanted people to know (or at least think) that the whole world was knocking on my door.
Obviously these are two very different approaches — she was afraid of being seen as responding to other potential employers, while I was aggressively advertising it. Which approach works depends on the organization. Her firm demanded a culture of loyalty, while the academic labor market doesn’t. My dean says quite explicitly that you’ll get a raise when someone else wants to pay you more. That policy makes sure that I don’t get arbitrary pay raises that the university doesn’t have to pay. It also leads to some perverse incentives.
Loyalty is a two-way street
Nothing in the macroeconomy stops an employer from raising someone’s wage. It’s very hard to write labor contracts that account for everything, because “everything” is hard to observe. Still, a boss can call someone in and say: You’re doing valuable work and we want to pay you more. That’s a culture that rewards internal markers, which hopefully makes you less likely to go out to the market.
If the only route to a raise is out the front door, that’s an HR department that’s too rigid. It will either lose good people or create bad outcomes for those who stay.
And if you’re the loyal worker whose raises keep falling short of the cost of living, perhaps it’s time to consider that your company isn’t valuing you. You may want to look elsewhere. But before you go, make sure they understand that if they don’t pony up, you’re out the door. If that’s the truth, it can’t hurt to say so.
Other questions Augusta put to me:
Is this jobs report as good as it looks? (Answer: Yes.)
Wages have edged ahead of prices since January 2025, but over the past year they’ve lagged inflation. Are workers winning or losing?
In the age of AI, should everyone become a nurse?
Finally, is there a case against a December hike?
Markets put the odds of a December rate hike around 80%, but with this jobs report in mind, Augusta asked me to make the case for the doves.
The standard case would go like this. The inflation we’re facing now is mostly a supply shock coming from tariffs and oil. Supply shocks push prices up to a new level, and once they’re there, they stop rising. Inflation is the rate of change of prices, so the blip goes away. And oil prices have stopped rising.
If you look through that, underlying inflation is something like 2½% or maybe 3%. Then look at what drives that. Labor is the biggest cost for most businesses. Wages are growing at only about 3%, and productivity growth may be eating into that. So unit labor costs, or the cost of the labor that goes into each unit of output, are probably rising at less than 2%. By this story, once everything washes through the system, inflation may be on course to come in below target in a few years.
Then there’s the case Handsome Kevin will be weighing. He wears a suit and talks to finance types and watches markets closely. Thursday brought a sharp stock market correction, which hits the wealth of people who spend a lot of money. Less wealth means less consumption spending, translating into a weaker economy. That argues against raising rates.
But an AI-related selloff cuts both ways. A big part of the Fed’s argument for not responding more aggressively to halt inflation has been that AI-driven productivity growth may help us out. If the market is waking up to AI being less awesome, or the build-out slowing down, that productivity may not materialize. And that makes the dovish case a bit weaker.
On balance, I lean slightly toward raising rates, with trepidation. We shouldn’t mistake consensus for certainty. There’s a lot of consensus — most economists agree, on balance, with the need to raise rates. But there’s also a lot of uncertainty, and few would claim to know what the Fed should do next.
Watch the full episode for the rest.
GREAT ARTICLE.
US. labor union density peaked in 1954 at roughly 33.5% to 35% of the workforce, compared to 10.0% today, while long-term inflation-adjusted (real) hourly wage growth slowed from an average of ~2.2%–3.0% per year during the union peak era to ~0.6% per year in the modern era.
As well, in economic theory, the mechanism known as capital-labor substitution (or the Ricardo effect), where firms respond to rising wages, tight labor markets, or shareholder pressure for higher margins by investing in labor-saving machinery, software, and artificial intelligence.
In my opinion unfortunately American work force, “our goose is cooked”, and in reality we are better to aspire to be self employed entrepreneurs.