Macro indicators drive 19 percent of structural labor slack gauge
Federal Reserve economists developed a Structural Labor Market Indicator synthesizing nine labor margins within a New Keynesian model. The framework demonstrates that macroeconomic aggregates such as GDP growth and inflation account for 19 percent of the variation in labor market slack.
Nine margins, one coherent signal
Federal Reserve researchers Isabel Cairo, Hess Chung, Francesco Ferrante, Cristina Fuentes-Albero, Camilo Morales-Jimenez, and Damjan Pfajfar constructed a Structural Labor Market Indicator (SLMI) for the U.S. economy spanning 1987 to 2026.
Built on a medium-scale New Keynesian model with search-and-matching frictions, endogenous labor force participation, and variable hours, the framework evaluates deviations from flexible-price equilibrium across nine labor margins.
The first principal component of these gaps accounts for the vast majority of total variance, yielding an eigenvalue above one.
The model-based gaps generate an Okun coefficient of -1.7, matching Federal Reserve staff estimates of -1.68.
Macro data breaks the labor blind spot
Conditioned on 14 macroeconomic observables, the SLMI demonstrates that non-labor aggregates account for nearly 19 percent of the variance in labor slack.
Historical shock decompositions show that risk premium and investment efficiency disturbances drove the deep slack of the 2008 financial crisis and the pandemic recession.
With time-varying monetary policy rule coefficients estimated from Summary of Economic Projections data, monetary shocks play a negligible role after 2013.
The indicator also provides earlier turning-point warnings than traditional measures.
A necessary structural upgrade
The paper exposes the critical blind spots of relying solely on headline unemployment.
Heavy dependence on DSGE calibration creates model risk, particularly during fragile recovery phases.
Yet filtering labor dynamics through broader macroeconomic data offers an essential upgrade for central bank diagnostics.