US labor market is getting tighter

Demographic factors may have had a dampening effect on reported wage grow, but this should not fundamentally change the relationship between slack and labor costs. With the unemployment rate expected to drop to 4.9% by the end of the year, and with an assumed NAIRU of 4.8%, the model projects a pickup in wage growth to 2.4% by the end of the year and 2.9% by the end of 2016. A gradual normalization in productivity growth is expected, which means that inflationary pressures will build gradually. 

Although there is some downside risk to the wage projections, there is an equally important downside risk to productivity growth which may have been held down by a number of factors other than demographics. This includes the re-absorption of long-term unemployed and discouraged workers into the workforce, re-regulation, and the sluggish growth in capital stock. These factors may take a while to reverse, thus keeping a lid on productivity growth and boosting unit labor costs. In this case, inflation could indeed surprise on the upside.