U.K. Underemployment Shows Labor Market Slack, Niesr Paper Says

An increasing number of Britons are working less than they want to and the issue of so-called underemployment is a better indicator than the jobless rate of slack in the labor market, according to a paper published today.

Using data in the Labour Force Survey, David Bell and David Blanchflower said underemployment rose to 9.9 percent in 2012 from 6.2 percent in 2008. That’s above the unemployment rate of 7.9 percent, according to the most recent data.

In the paper, published by the National Institute of Economic and Social Research in London today, they said the phenomenon is “particularly concentrated” among the young, with 30 percent of 16-24-year-olds in employment wanting to work longer hours. It means the labor market for that age group is tougher than traditional data 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,” according to the paper.

Underemployment partly explains why Britain’s jobless rate didn’t rise as much as expected during the recession as companies cut costs by reducing working hours rather than firing staff. Still, the resulting weak productivity has raised concerns about potential cost pressures once the economy recovers and demand increases.

“This new measure helps us to understand the true level of excess capacity in the U.K. labor market,” according to the paper. “It is also clearly relevant to the debate about the size of the output gap. It supports the view that even a substantial increase in aggregate demand is unlikely to exert significant upward pressure on real wages.”

Bell is a professor at the University of Stirling, Scotland. Blanchflower is a professor at Dartmouth College and a former Bank of England policy maker.