A New Measure of the Unemployment Gap
Pascal Michaillat, Emmanuel Saez
abstract・In the United States, the government is mandated to maintain the economy at "full employment.'' Since achieving zero unemployment is physically impossible—because of the constant flows of workers between employment and unemployment—policymakers need to determine the unemployment rate corresponding to the legal concept of full employment and measure how far the economy is from it. This paper aims to provide such a measure. Using a matching model of the labor market, we develop a formula of the unemployment gap: the distance between the current and efficient levels of unemployment. The formula expresses the unemployment gap as a function of four sufficient statistics: (1) current unemployment rate, (2) shape of the matching function, (3) nonpecuniary value of unemployment, and (4) share of the workforce devoted to recruiting. We apply the formula to the the United States and find that the unemployment gap is as high as 4 percentage points in bad times and as low as -1 percentage points in good times. Our unemployment-gap measure has implications for the efficiency of the labor market, the nonpecuniary value of unemployment, the behavior of the Federal Reserve over the business cycle, as well as government spending over the business cycle.