If one uses a broader measure of labour market slack including the unemployed, underemployed and those marginally attached to the labour force – the so-called “U6” – that measure currently covers 18% of the euro area labour force.4 Phillips curve models that employ this measure appear to be more successful in predicting inflation.5 A third reason why slack might be larger is the effect of so-called “global slack”.
This is the notion that globalisation has made labour supply characteristics more uniform across the globe and labour markets more contestable. Conditions in foreign labour markets could therefore have a dampening effect on domestic inflation even as domestic slack is shrinking. The evidence, however, is not clear-cut.