Unemployment and Wages in the US – Long-term unemployed should not be strongly discounted from measures of slack research finds

Some have argued that the unemployment rate may overestimate labor market slack, because the long-term unemployed (LTU) are largely structurally unemployed and exert significantly less wage and price pressure. If so, then using the aggregate unemployment rate to forecast wage or price inflation may be misleading. 

However, this Note, along with the companion note showing that a states LTU rate normalizes as its STU rate normalizes, and the cross-city inflation-based evidence presented in Kiley 2014, suggest against the idea that the LTU should be strongly discounted from measures of labor market slack.This Note also provides some suggestive empirical support for possibly considering broader measures of labor market slack, such as those including non-participants who may be somewhat attached to the labor market, when assessing wage and price pressures. However, despite the empirical advantage that cross-state variation provides, it is still difficult to disentangle the separate effect on wages from various measures of slack, as many of these measures are closely related within and across states. Nevertheless, taken as a whole, these findings suggest that the LTU should not be strongly discounted from measures of slack, because they traditionally exert similar wage pressures as the STU. Moreover, because some segments of those not in the labor force also appear to generally apply downward pressure to wages as well, the unemployment rate may somewhat understate the degree of labor slack that matters for aggregate wage and price movements.

Chosen excerpts by Job Market Monitor. Read the whole story at FRB: FEDS Notes: The effect of labor slack on wages: Evidence from state-level relationships.

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