US nonfarm payrolls rose by 261,000 in October, less than the expected 313,000. The past two months, however, were revised upward by 90,000, reflecting swings in employment due to hurricane disruption.

The market-moving news, though, was the muted rise in average hourly earnings, up by only 2.4% year-on-year. That compares to consumer inflation of 2.2%, which means that real wages are dead in the water. The labor force participation rate also declined, from 63.1% to 62.7%, undermining the argument that slack is disappearing from the labor force.

The dollar weakened sharply on the news, falling from 1.614 euros to 1.68 euros as of 8.36 a.m. The market had expected a 2.7% year-on-year increase in average hourly earnings. What accounts for the failure of wages to rise during the late stages of a recovery? Part of the answer is that the growth of employment and output never got the economy back to its long-term trend, in contrast to every previous economic recovery. Part of the answer, as Asia Unhedged reported earlier, is the aging of the labor force (older workers are more risk-averse and will trade income for job security, an idea suggested by Prof. Edmund Phelps).

Whatever the reason, this is a good environment for corporate profits. The Federal Reserve has operated under the erroneous assumption that a falling (mismeasured) unemployment rate would push up wages and squeeze profits, but no such thing has happened. Low wage increases correspond to lower-than-expected inflation, low term yields, a cautious Federal Reserve, and high profits. That’s a good environment for equities, and suggests that today’s high equity valuations can be sustained.