While several methods can measure labor market slack, two Federal Reserve Bank of Cleveland researchers say the two concepts "agree" that the long-term unemployment rate is "almost" at its "normal" level.
The five methods Murat Tasci and Randal Verbrugge use are: looking at trends in labor market flows; creating a particular type of theoretical sticky-price model of the economy and then estimating it; unobserved components modeling; forecasting; and examining price or wage growth to determine the NIIRU (nonincreasing inflation rate of unemployment).
Two of the concepts have the potential to determine whether the unemployment rate is near its "normal" level: the labor-market-flows-based approach and the flexible-wage-counterfactual approach.
The two methods don't always agree, but "at present, they do agree. And both give essentially the same answer:" the unemployment rate is "almost" at its long-term "normal" level.
The researchers say "since they have focused on the unemployment rate as their sole measure of the state of the labor market, they cannot claim to have shown that slack in the labor market has been eliminated. And even considering the unemployment rate alone, they found significant statistical uncertainty surrounding their estimates of slack," according to a Fed release. "But the fact that each of the slack estimates yielded a significant forecast improvement at the two-year horizon implies that each conveys useful information, say the researchers. And the fact that these disparate slack estimates - which were constructed using a variety of underlying data sources - are now so close to one another is fairly strong evidence that the unemployment rate has nearly reached its long-run level."
