The difference between the output gap and the employment gap reflects the cyclical swings in productivity.

If you look at productivity growth you will find it is a great leading indicator of output growth -- productivity growth leads real gdp growth by two quarters -- and this
is what explains the divergence you found.
spencer | 05.30.05 - 9:37 am | #

Thanks spencer. If anyone knows of recent investigations of the lead-lag relationship between output, unemployment, productivity, etc. I'd appreciate the cites. It appears that relationship has changed since 1990 (from inspection of the graphs) and I'm wondering it that has been addressed empirically.
Mark Thoma | Homepage | 05.30.05 - 11:35 am | #

The problem is that almost all of the leading indicators are for the industrial economy. But that has become smaller and its impact has been signinficantly impacted by imports. Inventory corrections now show up more as a cut in imports then a cut in industrial producion.
But with the increased role of services we do not have good leading indicators of the service sector.

Moreover, the overall economy has become more stable -- only 2 minor recessions in almost 25 years-- so we do not have as much opportunity to test new indicators.
spencer | 05.30.05 - 12:50 pm | #

That's true. Watching variables such as inventories may tell you very little about the service sector except to the extent that shocks are common across service and industrial sectors, and not all are. I wonder what a good service sector indicator would be? Hmmm. Someone must have looked into this.
Mark Thoma | Homepage | 05.30.05 - 12:59 pm | #

Here is one paper that looks at leading indicators for the service sector, but it's a bit dated (1989) - I'll see if I can find more.
Leading Indicators for the Service Sector

Here's something by Robert Gordon discussing the problem (1996):
Problems in the Measurement and Performance of Service-Sector Productivity in the United States

Here's a discussion of the problem in Canada (1999):
The productivity paradox: evidence from indirect indicators of service sector productivity growth
Mark Thoma | Homepage | 05.30.05 - 1:47 pm | #