It’s a tight labor market, and unemployment is at a 50-year low. So why aren’t wages rising?

Recently we learned that the nation’s unemployment rate fell to a nearly 50-year low. Great news, right? Yes, but job gains have slowed and wage increases are moderating.

Aren’t wages supposed to rise when labor markets are tight? And isn’t job growth supposed to be strong when the economy is expanding solidly?

What is really going on in the economy? If you understand the context of the decline in the unemployment rate, it is clear that the number might not accurately describe economic conditions.

Let’s start with the unemployment rate, which dropped to 3.5% in September. The last time it was that low was December 1969. But the 50-year-old number is skewed. Then, the Vietnam War was raging and nearly 3.5 million men and women were in the military and out of the labor market. Today, there are a little less than 1.4 million active-duty members.

This shrinkage in the size of the active-duty military is important since the employment data only count the civilian population. Given that many young and less skilled individuals, groups that tend to have elevated levels of unemployment, were drafted into the military during the Vietnam War, the unemployment rate would likely have been a lot higher had there not been a war going on. That makes the current near-record low rate even more impressive.

The depressed rate of unemployment has significant implications for businesses: There aren’t a whole lot of individuals looking for jobs, especially given the number of additional employees companies are looking to hire.

The number of job openings has exceeded the number of people unemployed for the last 18 months. Even if you add in all the marginally attached workers and those working part time who would like to work full time, there still aren’t a whole lot of extra workers out there for businesses to hire.

And for businesses, many of those unemployed or not in the workforce either don’t have the requisite skills, have background-check issues, or live in areas where jobs are just not available. And let’s not forget that while age discrimination is illegal, it is still not uncommon.

Any way you measure it, the level and rate of unemployment in the country is extraordinarily low. And that should signal the economy is in great shape and the labor market is tight.

When labor markets are tight, when demand exceeds supply, you would think that workers would be in position to get better wage increases. Well, that has not exactly been happening.

Increases in income and hourly wages have been slowing, not accelerating, for nearly a year now. Not surprising, that time frame coincides with the ramping up of the trade war and the decline in business confidence.

It appears that companies have become more cautious in their hiring and are willing to accept elevated levels of unfilled positions rather than pay higher wages to either attract workers from other firms or induce workers who are not in the labor force to enter into it.

As a consequence, job growth has slowed.

Over the last six months, private-sector payroll increases have averaged a modest 133,000 and for the past three months, the average month gain has been less than 120,000. That is hardly a sign of a robust economy.

And even those numbers may be overestimates. The Bureau of Labor Statistics recently reported that after completing its annual revision of data, which is done when more complete and better information is available, job gains in 2018 were actually about 500,000 less than initially reported. Hiring was not nearly as strong as thought.

If those trends hold true this year, and that is likely to be the case when the updated 2019 numbers are released, the modest levels of job gains we are currently seeing could wind up being even lower.

So, why is the unemployment rate still falling? Given the growth in the labor force, it takes only about 100,000 new hires to keep the rate stable. That we are adding more than that is the reason the unemployment rate is still declining.

And that means one thing: The unemployment rate, which is usually the focus of attention, is not the right number to watch. If it were, the economy would be booming. It is clearly not doing that.

Instead, watch the job gains and wage data. If they keep deteriorating, it will be a clear sign the economy is in trouble.