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Minding the Output Gap: What Is Potential GDP and Why Does It Matter?
Potential output is an estimate of what the economy could produce. Actual output is what the economy does produce. If actual is below potential -- a negative output gap -- there is "slack" in the economy. If actual is above potential -- a positive output gap -- resources are fully employed, or perhaps overutilized. This issue of Page One Economics explains how the output gap is useful for checking the health of the economy. It also points out how errors in the estimation of potential real GDP can reduce the effectiveness of policy.
Briefing
Projecting Unemployment and Demographic Trends
Demographic forces have profoundly shaped the dynamics of U.S. labor force participation and unemployment over the past forty years. Recognizing the importance of these employment indicators for the conduct of monetary policy, this Economic Brief explores how they have been influenced by the U.S. population's changing gender, educational, and age profile. Based on the authors' estimates, the trend U.S. unemployment rate will decline to 4.3 percent over the next ten years as the population continues to age and increase its educational attainment.
Working Paper
The Long-Lived Cyclicality of the Labor Force Participation Rate
How cyclical is the U.S. labor force participation rate (LFPR)? We examine its response to exogenous state-level business cycle shocks, finding that the LFPR is highly cyclical, but with a significantly longer-lived response than the unemployment rate. The LFPR declines after a negative shock for about four years—well beyond when the unemployment rate has begun to recover—and takes about eight years to fully recover after the shock. The decline and recovery of the LFPR is largely driven by individuals with home and family responsibilities, as well as by younger individuals spending time ...