Direct Estimates of Unemployment Rate and Capacity Utilization in Macroeconometric Models

Abstract

The degree of resource utilization is an important and strategic economic concept in giving anl overall measure of economic efficiency. The problem of measuring capacity utilization as an aggregative statistical indicator of resource utilization is an old one that hlas never been handled in a1 definitive way. In this paper, we do not claim to be definitive., but we do hope to have contributed to an understanding of some of thie issues and offer a plausible, but tentative, solution. At the same time, we try to clarify the role of the aggregate production function or groups of them in the specification and application of a macrocconometric model. As will be made clear in what follows, the aggregate production function will be seen to play a key role in estimating and defining capacity utilization. Unemployment deals with utilization of a single production factor, while capacity utilization deals with all factors, in some sense.3; therefore we shall attempt to forge a link between these two separate measures --the unemployment rate and the rate of capacity utilization. Capacity utilization has been estimated as a statistical series in a variety of ways and there are some highly significant differences among the various measures available.' From a theoretical viewpoint, full capacity output might be defined in terms of the cost function or the production function. In the former case, it is defined to be the point of minimum average cost. There can be alternative concepts in the short run and the long run, corresponding to minimum cost points on either the short run or the long ruen cost function. These are economic concepts of capacity because they involve unit factor costs in determining macro cost functions. These are used to get at the output levels for minimum cost. With the help of the macro production function, a physical measure of full capacity output can be designed. In the simplest case let us write