Working Paper: NBER ID: w21094
Authors: David G. Blanchflower; Andrew T. Levin
Abstract: In the wake of a severe recession and a sluggish recovery, labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.
Keywords: No keywords provided
JEL Codes: E24; E32; E52; E58; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| underemployment (J64) | employment gap (J63) |
| hidden unemployment (J64) | employment gap (J63) |
| employment gap (J63) | nominal wages (J31) |
| underemployment (J64) | wage growth (J31) |
| unemployment (J64) | wage growth (J31) |
| labor market slack (J29) | nominal wages (J31) |
| true unemployment rate (J64) | nominal wages (J31) |