Measuring Labor Market Slack: Are the Long-Term Unemployed Different?

Dent, Robert C.; Kapon, Samuel; Karahan, Fatih; Pugsley, Benjamin; Şahin, Ayşegül

Discussion Paper

Measuring Labor Market Slack: Are the Long-Term Unemployed Different?

Abstract: There has been some debate in the Liberty Street Economics blog and in other outlets, such as Krueger, Cramer, and Cho (2014) and Gordon(2013), about whether the short-term unemployment rate is a better measure of slack than the overall unemployment rate. As the chart below shows, the two measures are sending different signals, with the short-term unemployment rate back to its pre-recession level while the overall rate is still elevated because of a high long-term unemployment rate. One can argue that the unemployment rate is exaggerating the extent of underutilization in the labor market, based on the premise that the long-term unemployed are, in practice, out of the labor force and likely to exert little pressure on earnings. If this is indeed the case, inflationary pressures might start building up sooner than suggested by the overall unemployment rate. In a three-part series, we study the available evidence on the long-term unemployed and argue against this premise. The long-term unemployed should not be excluded from measures of labor market slack.

Keywords: labor market slack; long-term unemployment; wage pressure;

JEL Classification: E2;