What’s the Best Measure of Economic Slack?

RePEc Short ID: pba542
ORCID iD: 0000-0003-3967-1453

Barnichon, Régis; Shapiro, Adam Hale

Journal Article

What’s the Best Measure of Economic Slack?

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.

Keywords: slack; inflation forecasts; labor market tightness; job vacancies to unemployment ratio; employee job switching rate;