How Much Slack Remains in Resource Utilization?

Abstract

This memo analyzes the amount of “slack” or underutilization of resources in mid-2014, primarily focusing on the unemployment rate gap. It compares the FRB staff’s unemployment rate gap with alternative measures, including other unemployment rate gaps, output gaps, manufacturing capacity utilization, and various labor market indicators. Although many indicators align with the staff’s unemployment rate gap, some, like the JOLTS job openings rate, suggest a tighter labor market. Conversely, the wide labor force participation rate gap and elevated involuntary part-time employment suggest the unemployment rate gap might understate the true degree of labor market slack. The memo concludes by noting the wide range of slack estimates and the potential for alternative indicators to suggest either more or less slack than the unemployment rate gap, especially given the absence of appreciable acceleration in wages and prices.