UK underemployment rates more accurate measure say economists

The current economic downturn differs from previous recessions in that unemployment rates haven’t been quite as devastating, with employers opting to freeze pay rates and offer flexible working and reduced hours in order to retain staff. But according to a white paper published today this has led to an important new phenomenon – underemployment. In the latest issue of the National Institute Economic Review, economists David Bell and David Blanchflower of the University of Stirling and Dartmouth College describe workers who are underemployed when they are willing to supply more hours of work than their employers are prepared to offer.

This rate has risen from 6.2 per cent of the UK workforce in 2008 to 9.9 per cent in 2012. Over the same period, the unemployment rate rose from 5.8 per cent to 8 per cent.

The conventional measure of the difference between supply and demand in the labour market is the unemployment rate, but the number of workers willing to supply extra hours can be measured using the UK Labour Force Survey, which also asks underemployed workers how many extra hours they would be willing to work at the same pay rate. Expressing the number willing to supply extra hours as a share of the workforce gives an estimate of the underemployment rate.

Bell and Blanchflower’s new index measures labour market slack, which combines both unemployment and underemployment. It expresses the additional hours that the unemployed and underemployed are willing to provide as a share of total workforce hours. It also accounts for overemployment. Some workers, particularly those aged over 50, want to work shorter hours and are willing to accept less pay.

The main driver of the demand for increased hours appears to be a fall in real wages. Total hours worked in the economy have increased since the beginning of the recession. But a combination of slow-growing wages and price inflation averaging above 3 per cent since 2008 has led to a reduction in the real value of take-home pay.

When the extra hours that the underemployed desire equals the reductions in hours sought by the overemployed the Bell-Blanchflower index simply reproduces the unemployment rate.  This was broadly the case from 2001 to 2007. But as increasing numbers of workers say they want more hours and fewer would like to reduce their hours, this new index rises above the unemployment rate.

For 2012, the index stood at 9.9 per cent, well above the unemployment rate of 8 per cent.

This new measure is relevant to the debate about the size of the UK output gap and, argues the economists, supports the view that “even a substantial increase in aggregate demand is unlikely to exert significant upward pressure on real wages.”

By Sara Bean