Introduction to the Policy Forum on the NAIRU

The general aim of the article is to verify the extent of labor market slack at three moments considered crucial when analyzing labor market changes caused by the COVID–19 pandemic. The main goal is to identify similarities and differences between EU countries grouped into clusters identified during the research.The study uses cluster analysis to classify the EU members into groups of similar countries according to the labor market slack variables observed before (2019) and during the pandemic (2020, 2021). A two‑stage approach was selected. In the first stage, hierarchical analysis was used to determine the initial number of groups, while in the second stage, the proper classification of objects was made using the k‑means method.A comparison of changes taking place in the labor markets of the analyzed countries allows us to select four homogeneous clusters of countries in all periods under study. The results also show that the labor market slack in most EU countries did not change over the analyzed period, although some countries improved (like Ireland, France, and Cyprus). The reason could be the effectiveness of measures that support labor markets that were implemented during the pandemic. The country where the labor market slack situation worsened is Italy.It would be valuable to analyze in more detail the effectiveness of labor market policies and programs from countries in the identified clusters because they contributed to a relatively stable labor market slack situation. Future research should also be directed towards analyzing changes on the side of employment, including a sectoral analysis, which would expand the knowledge of the labor market during the COVID–19 crisis. Moreover, to deepen the analysis of labor market slack, the demographic structure could be included.Analysis of the labor market based solely on the unemployment rate is insufficient, which is even more visible in the face of the consequences caused by the COVID–19 pandemic as that measure does not include the “discouraged worker effect”. For the EU, there is a research gap regarding this effect, which can be gleaned from the labor market slack statistics. This article, therefore, fills the gap.

It is an indisputable fact that COVID-19 has changed so many aspects of our society. In this article, we investigate how COVID-19 impacted unemployment in Europe. This issue is also relevant to UN Sustainable Development Goals, which explicitly mentions eliminating poverty as an ultimate target. As a proxy for poverty elimination, we use monthly unemployment rates and labor market slackness. Our methodology makes before and after the COVID-19 analysis of the unemployment trends in five-big EU countries. These countries are Germany, Spain, France, Italy, and Poland. They are chosen based on their population. We use tabular and visual analysis to compare the impact of the COVID-19 induced economic crises on these countries' unemployment rates and labor market slackness. Our results show that while the pandemic has negatively impacted unemployment rates and labor slackness, there is a strong recovery in the labor market.

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 reect 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 nd strong statistical evidence that each of these forms of labor market slack exerts signicant 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.

After the 1980s, advanced capitalist economies witnessed a significant decline of the labor share in income. Along with the conventional view, which ascribed this decline to technological factors and international trade, another line of enquiry has endorsed a ‘Political Economy’ approach to identifying several drivers of the labor share erosion. Among the latter, the role of persistent labor market slack has remained relatively unexplored. We try to fill this gap moving from a recent contribution by Anwar Shaikh, who elaborated on the relation between unemployment and changes in income distribution and in the US economy. We study this relationship by adopting a long-term approach, using two alternative measures of labor market slack (namely, the unemployment rate and the unemployment intensity, an index that incorporates the duration of unemployment). We first extend Shaikh’s method of analysis to eight mature countries, and subsequently we approach the relationship between changes in labor market slack and the (adjusted) wage share in the private sector of the economy from 1960 to 2017 with other econometric techniques. Our findings confirm the existence of a negative relationship between labor market slack and the wage share, and we find no tendency to return to a ‘normal’ unemployment rate associated with a stable wage share.

Janet Yellen, former Chair of the Federal Reserve, intimated that the official unemployment rate (U3) is an inadequate measure of labor market slack when she highlighted the “possibility… that labor market slack is not appropriately measured by the civilian unemployment rate” (2019). Thus, we explore the difference between U3 and a more inclusive estimate of unemployment, U6, in order to understand the extent to which U3 misinforms the public, policy makers, and researchers.We find that the gap varies substantially over the business cycle and especially so for the most vulnerable – minorities, youth, and the less educated. This is because these groups are most likely to work part-time involuntarily the longest after the end of a recession and therefore bear the brunt of the burden of its lingering impact for many years thereafter. For African Americans, for instance, it took 7 years and 4 months longer for the recession of 1990/1991 to end. After the Great Recession the Hispanic gap also remained at an elevated level of 10 percentage points from October 2009 through June 2013. In January 2011 U6 climbed to 47.5% among African American youth and the U6-U3 gap was 18 percentage points and was similarly large among African Americans without a high-school diploma. In other words, not only does U3 mislead but the degree to which it does so varies greatly by ethnic group. JEL Classifications: J40, J49, J69 Unemployment, U6, African American unemployment, Hispanic unemployment discouraged workers, labor market slack

In the social policy and political discussions sufficient attention is usually oriented to the number of unemployed persons, while some other important issues related to the labour market are hidden or neglected. One of these is the labour market slack. That is the difference between the volume of work desired by workers and the actually available volume of work. The unemployment rate, as the usual indicator of situation on the labour market, does not take account of inactivity that is often bigger problem than open unemployment. This is very useful book about the phenomenon of the labour market slack entitled Estimating labour market slack in the European Union.

The deep deterioration in the labor market during the Great Recession, the subsequent slow recovery, and the missing disinflation are hard to reconcile for standard macroeconomic models. We develop and estimate a New-Keynesian model with financial frictions, search and matching frictions in the labor market, and endogenous intensive and extensive labor supply decisions. We conclude that the estimated combination of the low degree of nominal wage rigidities and high degree of real wage rigidities, together with the small role of pre-match costs relative to post-match costs, are key in successfully forecasting the slow recovery in unemployment and the missing disinflation in the aftermath of the Great Recession. We find that endogenous labor supply data are very informative about the relative degree of nominal and real wage rigidities and the slope of the Phillips curve. We also find that none of the model-based labor market gaps are a sufficient statistic of labor market slack, but all contain relevant information about the state of the economy summarized in a new indicator for labor market slack we put forward.

Standard macroeconomic models find it difficult to reconcile slow recoveries and missing disinflations after deep deteriorations in the labor market. We develop and estimate a New-Keynesian model with search and matching frictions in the labor market, endogenous intensive and extensive labor supply decisions, and financial frictions. We conclude that the estimated combination of a low degree of nominal wage rigidities and a high degree of real wage rigidities, together with a small role for pre-match costs relative to post-match costs, is key in successfully forecasting slow recoveries in unemployment and missing disinflations in the aftermath of recessions, such as the Great Recession. We find that data on endogenous labor supply decisions (participation and hours) are very informative about the relative degree of nominal and real wage rigidities and the slope of the Phillips curve. We also show that none of the model-based labor market gaps are a sufficient statistic of labor market slack, but all contain relevant information about the state of the economy summarized in a new indicator for labor market slack that we propose.

Non-linearity in the wage Phillips curve: Euro area analysis

In this paper, we test whether a wage Phillips curve can still be considered a reliable approximation of nominal wage determination in Poland, Hungary and the Czech Republic. The empirical evidence is broadly in favour of the existence of a negative relation between labour market slack and nominal wage inflation in the Central and Eastern European (CEE) economies between 2001 and 2017. However, after 2009 wage inflation was significantly below the value that would have been predicted by an estimated wage Phillips curve. The results of rolling OLS estimations confirm a weakening of the negative relation with the unemployment gap. A closer look at the recent evolution of labour market conditions in Poland, Hungary and the Czech Republic suggests that the composition effects on labour supply, especially those linked to demographic and migration trends, could be particularly relevant. Other possible explanations generally mentioned with reference to advanced economies - such as a large share of long-term unemployment, part-time and temporary workers or workers that are underemployed or marginally attached to the labour market - probably had no role or only a marginal one in the recent weak nominal wage growth in the three countries.

We use advance layoff notices filed under the Worker Adjustment and Retraining Notification (WARN) Act as an indicator of current and imminent labor market conditions. We have constructed a database of establishment-level notices starting in 1990 by scraping state government websites, contacting state officials, and retrieving historical data. We find evidence that these notices, aggregated to the national level, lead other prominent labor market indicators, such as initial unemployment insurance claims, the change in the unemployment rate, and changes in private employment. The lead relationship seems strongest at one month with economically meaningful magnitudes. Most recently, WARN data suggest a slight increase in labor market slack.

With a duopsony model, we study how earnings inequality, firm size distribution, and labor market slack vary across local labor markets and the business cycle. In booms, due to high aggregate productivity, there is fierce competition with resulting high wages and full employment. During recessions, there is labor market slack and firms enjoy local market power. In periods in which the economy is moving into or out of a recession, there is an “accommodation” phase, with firms shrinking their labor forces and paying lower wages instead of competing for poached workers. We show that the impact of economic shocks on wage dispersion and inequality may vary not only due to the nature of the shock, but also based on which equilibrium the economy may have settled in.

This study provides the first county-level analysis on the employment and wage effects of medical marijuana laws (MMLs). Since traditional state-level difference-in-differences analyses might not fully capture unobserved heterogeneity in changes in the local labor markets, we employ a border discontinuity design to improve the comparability between the treated and control groups. Specifically, we compare changes in employment and wages between contiguous border counties of neighboring states with and without MMLs. Using county-quarter level data from the 1990-2012 Quarterly Census of Employment and Wages, we find that MMLs are associated with a 1.5 percent decline in wages. We also find that the wage effect occurs with a two-year lag and appears to be more pronounced in the trade, transportation, and utilities sectors. However, the estimates of the effect of MMLs on employment counts are imprecise. Finally, our additional analysis provides suggestive evidence that MMLs are associated with a modest increase in labor market slack, which could potentially explain the wage decline in the absence of employment adjustment.

Even though institutions are created to protect workers, they may interfere with labor market functioning, raise unemployment, and end up being circumvented by informal contracts. This paper uses Brazilian microeconomic data to show that the institutional changes introduced by the 1988 Constitution lowered the sensitivity of real wages to changes in labor market slack and could have contributed to the ensuing higher rates of unemployment in the country. Moreover, the paper shows that states that faced higher increases in informality (i.e., illegal work contracts) following the introduction of the new Constitution tended to have smaller drops in wage responsiveness to macroeconomic conditions, thus suggesting that informality serves as a escape valve to an over-regulated environment.

Many studies have documented the missing relationship between PCE inflation and the labor market slack in the last 20 years. This paper first presents evidence of a strong sensitivity of price inflation to labor market tightness once we remove the late 90s from our sample and account for the Phillips curve’s endogeneity and nonlinearity. However, the Phillips curve can neither explain nor forecast the Core PCE inflation rate since 1995. This shortcoming is of great concern, given that the Fed utilizes the Core PCE as its primary tool to measure inflation and formulate its monetary policy. Second, we propose the Underlying Inflation Gauge (UIG) and the Median CPI to measure inflation better. We show that the Convex Phillips curve successfully explains and forecasts more than 90% of the UIG inflation movements from 1995:05 to 2019:03