The difficult thing about using the unemployment gap as an indicator of resource utilisation is to determine the sustainable rate of unemployment. However, this is not more difficult, in fact it is probably easier, than determining potential output and potential hours worked. On closer inspection, it can be seen that the sustainable rate of unemployment has several advantages compared to other measures of normal resource utilisation. The sustainable rate of unemployment can be expressed as a stable percentage – for example 5.5 or 6 per cent. It changes slowly and lies within a limited range. Estimating potential GDP is, in comparison, like shooting at a moving target. It grows over time, and in the view of many, can be seen as a random process, similar to a so-called random walk with drift. The sustainable rate of unemployment can be determined using several different methods – structural search models similar to those developed by the Nobel prize-winners Diamond, Mortensen and Pissarides, so-called UC-models, DSGE models and NAIRU estimates. The results of these different estimation methods can be compared and their robustness and reliability assessed. We can then calculate the average of the estimates and weight this with the assessed reliability of the various estimates. When estimating the sustainable rate of unemployment it is also important to include the assessed effects of labour-market reforms (Forslund 2008).
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