There are numerous potential causes of this mismeasurement, including: measures of unemployment that ignored the effects of part-time work and underemployment[5]; revisions to potential output which mistook cyclical changes for structural trends[6]; or a failure to fully account for external factors that added to euro area slack, such as relative demand imbalances linked to the trade surplus.
[7] Research supports such a role for “hidden slack”. Since 2011, studies that assume that the output gap has been much larger have, in general, outperformed those that use traditional estimates. [8] What is striking, though, is that in the run-up to the pandemic we saw labour market slack diminishing and wages finally rising, but without inflation picking up.