In December job growth slowed sharply and continued to remain weak in January, suggesting that more than bad weather is to blame. However, the unemployment rate tells a slightly different story. In January it dropped to 6.6% from 7% in November. If the unemployment rate were to hit 6.5%, the Federal Reserve may consider raising interest rates.
The Fed and other researchers have downplayed the significance of the UR, as discouraged workers stop looking for jobs. On February 11th Janet Yellen called the recovery in the labor market "far from complete" in her inaugural appearance before congress.
Figuring out the gap between actual and potential output is tricky because potential is hard to discern, and it is more uncertain than usual. In a recent report from a bank called Lewis Alexander of Nomura Securities, this bank calculated the output gap using three different market indicators (see chart in link). The proportion of people with jobs went down from 63% of the population in late 2007 to below 59% in 2009. It has barely moved at all from there since, which suggests that the output gap has not closed at all. In contrast, the unemployment rate is 1.1 percentage points above its estimated natural rate of 5.5% which suggests that most of the output gap has disappeared. In conclusion, if one were to look only at those who have been employed for less than 6 months, the output gap appears to have been closed completely.
http://www.economist.com/news/finance-and-economics/21596529-americas-labour-market-has-suffered-permanent-harm-closing-gap
And this can be bad news for businesses as well: if the output gap is nearly 0 then our economy has neither inflation nor deflation. But as discussed in class, moderate inflation, say 2-5% or something, is beneficial for most firms. Say inflation is 5% and firms raise the wages of their employees by 3%. Even though it appears as though the employees are making more money, their purchasing power has decreased by 2%, which is the same as cutting their wages by 2% with no inflation (aka good for businesses, bad for potentially unaware employees). Since we aren't really experiencing inflation now, firms are losing money when they give their employees the raises they anticipate on getting.
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