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What’s the Best Measure of Economic Slack?

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Abstract

Different ways of measuring the economy’s unused capacity, or slack, can result in varying inflation forecasts. Estimates suggest that direct measures of labor market tightness, such as the ratio of job vacancies to unemployment or the rate of employee job switching, provide more accurate forecasts than commonly used measures, such as the unemployment rate or the output gap. Recent elevated values of these measures of labor market tightness suggest greater inflation pressure than is implied by the unemployment rate alone.

Suggested Citation

  • Régis Barnichon & Adam Hale Shapiro, 2022. "What’s the Best Measure of Economic Slack?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2022(04), pages 1-05, February.
    • Handle: RePEc:fip:fedfel:93763
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    References listed on IDEAS

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    1. Giuseppe Moscarini & Fabien Postel-Vinay, 2017. "The Relative Power of Employment-to-Employment Reallocation and Unemployment Exits in Predicting Wage Growth," American Economic Review, American Economic Association, vol. 107(5), pages 364-368, May.
    2. Adam Hale Shapiro, 2008. "Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 627-666, June.
    3. Adam Hale Shapiro, 2008. "Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 627-666, June.
    4. Régis Barnichon & Luiz E. Oliveira & Adam Hale Shapiro, 2021. "Is the American Rescue Plan Taking Us Back to the ’60s?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2021(27), pages 1-06, October.
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    Cited by:

    1. Benigno, Pierpaolo & Eggertsson, Gauti, 2023. "It's Baaack: The Surge in Inflation in the 2020s and the Return of the Non-Linear Phillips Curve," CEPR Discussion Papers 18116, C.E.P.R. Discussion Papers.

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