Wednesday, 1 May 2013

Underemployment in the UK

In a new paper published today in the latest issue of the National Institute Economic Review, economists David Bell and David Blanchflower of the University of Stirling and Dartmouth College introduce a new measure of labour market slack. The conventional measure of the difference between supply and demand in the labour market is the unemployment rate. But it does not capture a phenomenon which has become increasingly important during the current recession - underemployment.

Workers are underemployed when they are willing to supply more hours of work than their employers are prepared to offer. 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. This rate has risen from 6.2 per cent of the UK workforce in 2008 to 9.9 per cent in 2012 (see figure 1). Over the same period, the unemployment rate rose from 5.8 per cent to 8 per cent.

Underemployment is particularly concentrated among the young, where unemployment rates are close to 20 per cent. In 2012, 30 per cent of those aged 16 to 24 that did have jobs wished to work longer hours.  This means that the labour market for the young is even more difficult than the raw unemployment rates imply. Even if there was an upturn in demand, employers would likely extend the hours of existing workers before taking the risk of hiring new young employees.

Ethnic minorities also have high rates of underemployment, particularly those that describe themselves as Black or Black British.

The main driver of the demand for increased hours is likely to be falling 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.

Bell and Blanchflower’s innovation is to produce a new index 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.

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 helps us to understand the true level of excess capacity in the UK labour market and the difficulties face by particular groups within this market.  It is also clearly relevant to the debate about the size of the UK output gap. It supports the view that even a substantial increase in aggregate demand is unlikely to exert significant upward pressure on real wages.


  1. Is there any evidence at all that the extra hours people say they would be willing to work actually corresponds to reality? This seems a very flimsy foundation on which to build any policy.

  2. Conceptually this is no different from the way we measure the unemployment rate, which asks people not current working if they are looking and want to work. So, if you're trying to measure the degree of labour market slack so as to inform macro policy, I think B&B's argument that this is a better (but obviously still imperfect) measure is strong. But it would be interesting - a separate research project - to look at the longitudinal data and see if people who want to work longer do in fact do so when opportunities arise.

    1. Is it of any importance, for measuring slack in the economy, to also look at those who are educated beyond the level required to do their current job and desire one to match their education level as I would imagine that would be a underutilisation of human resources.

  3. I wouldn't have thought the main driver would be falling wages but instead related to having more labour flexibility within firms while demand is low.

    For example having say 10 part time contracted workers on 16 hours would be better for a firm due to those workers likely wanting more hours when needed, giving more flexibility to firms. As opposed to 5 employees on 32 hour contracts who may have more of an issue accepting more hours.

    Then there is a possible labour hoarding going on by firms who hold more employees while demand is low expecting to easily be able to expand contracted hours or use overtime to plug a frictional gap between increasing the number of workers and demand rising. This also reduces training time and costs. Also reducing hours can mean holding onto proven talent as opposed to letting people go and having to recruit again in the future. Furthermore they are possibly less likely to have a redundancy pay-out.

    Also there are benefits for employers NI. Employers don't pay employers NI for employees who earn £149 or less a week, for example a part time worker on 16 hours on minimum wage earns £99.04 a week as opposed to an employee on 32 hours being £198.08 which is over the allowance rate.

    While there is plenty of slack in the labour market employers can take advantage of the benefits of part time worker more than in a tight labour market. This likely makes reducing hours more lucrative than losing staff by making redundancies when demand is low.

  4. It's not too surprising, many people I've known in manufacturing companies over the years have relied upon extra hours of overtime to live the way they are used to. 8-16 hours a week for decades is not unusual (anecdotally, in my experience). Of course, when things get tight, overtime is also one of the first things a company decides to cut.