LUCI: Your Best Friend for Measuring Labor Market Tightness

Jan Bruha, Adam Ruschka and Jan Šolc

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: Which labor market variable best describes labor market developments? What if one series suggests the labor market is tight, while another suggests a different story? To address these questions, we propose a composite index of labor market tightness called the LUCI: the Labor Utilization Composite Index. Its goal is to represent the overall cyclical position of the labor market. From a technical point of view, the LUCI is defined as the first generalized dynamic principal component of the cyclical parts of the labor market variables considered. These cyclical parts are filtered from the data using a multivariate filter that decomposes the data into fundamental cyclical developments, trends, and noise. In addition to being an indicator of overall labor market tightness, we show that the LUCI is a useful analytical tool. The LUCI serves as a measure of economic slack that is useful for the estimation of empirical price and wage Phillips curves. Moreover, based on the LUCI, we construct a measure of demand-driven inflation, called 'supercyclical inflation', which helps disentangle demand- and supply-driven inflation pressures. The LUCI thus enriches the set of analytical tools available to the Monetary Department of the CNB.

Keywords: Labor market; cyclical position; demand-driven inflation (search for similar items in EconPapers)
JEL-codes: E24 E31 E37 (search for similar items in EconPapers)
Date: 2024-09
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