Slack

SLACK

The amount of slack in the economy is essentially a measure of the quantity of unemployed resources. It represents the quantity of labor and capital that could be employed productively, but isn't; instead, it is idle. More formally, it is defined as the difference between the economy's productive capacity -- the amount of goods and services that could be produced if all labor and capital were fully and efficiently employed -- and the actual level of economic output.

Unfortunately, measuring the economy's potential is not an easy task. For example, what level of capacity utilization and what level of unemployment are consistent with the full employment of resources?

There is another way to gauge the amount of slack in labor markets: changes in real wages. If, in fact, the economy is nearing full employment, then it will be difficult for firms to attract the workers they need either from the pool of existing unemployed or by inducing people to reenter the workforce, and wages will begin rising.

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