Underemployment in the UK Revisited

By Bell, David N. F.; Blanchflower, David G. | National Institute Economic Review, May 2013 | Go to article overview

Underemployment in the UK Revisited


Bell, David N. F., Blanchflower, David G., National Institute Economic Review


This paper addresses the issue of underemployment in the UK labour market--the demand for hours of work is less than workers' willingness to supply extra hours. Workers would like to work more hours, but there is insufficient product demand to justify additional hours. This phenomenon has been evident in the UK labour market for some time, but has grown significantly during the Great Recession. In this paper, we develop a new index of underemployment which is intended to combine indicators of excess capacity on the extensive (jobs) and intensive (hours) margins of the labour marker. This index continued to increase during 2012, though unemployment was stable. The paper also investigates the microeconomic determinants of underemployment, finding that it is particularly prevalent among the young and unqualified.

Keywords: Unemployment; underemployment; under-utilisation

JEL Classifications: J01; J11; J21; J23; J38; J64

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The unemployment rate is the most common measure of labour market slack. It shows how many people are actively seeking work and are without a job, expressed as a proportion of the labour force, which is the employed plus the unemployed. The unemployment rate in the UK rose from a low of 5.2 per cent at the end of 2007 to a high of 8.4 per cent at the end of 2011 before falling back to 7.8 per cent at the start of 2013. But during the Great Recession we have also seen a steady increase in the UK in the number of the employed who want more work than is currently available to them--they are underemployed. This may partly be explained by falling real wages, which has also been a feature of the recession. For some people, principally home-owners with a variable rate or tracker mortgage, low interest rates have partly compensated for declining real wages. Nevertheless, it is now our view that there has been such a dramatic increase in underemployment that the unemployment rate is now a poorer indicator of the degree of slack in the labour market than it has been in the recent past. Further, estimates of the 'output gap' that rely on the unemployment rate may be giving a seriously misleading estimate of the degree of excess capacity in the UK labour market.

The underemployed are defined as those currently in work who would prefer to work longer hours. Their ability to supply hours at the current wage is constrained by the level of demand in the economy, because there simply isn't enough work around. Some of these people are classified in the official statistics as part-timers who would prefer to be full-time, but the phenomenon also applies to full-timers, which is not reported in the published Office for National Statistics (ONS) statistics. We have addressed this issue in an earlier article in this journal (Bell and Blanchflower, 2010). There, we suggested that underemployment might be associated with labour hoarding, the use of part-time and temporary contracts. It was facilitated by the flexibility of the UK labour market and was a particular problem amongst the young. A recession might also increase the number of discouraged workers who choose to leave the labour market. We showed that the underemployed are more likely to be depressed, suggesting that hours constraints have a negative effect on their well-being.

In this paper, we extend and update our analysis of underemployment. Firstly, we examine the evolution of underemployment since 2010, noting that it has risen over this period, at the same time as real wages have been falling sharply. (1) Secondly, we define a new measure --the underemployment index. Unlike the unemployment rate, which measures the excess supply of people in the labour market, the underemployment index measures the excess supply of hours in the economy. It combines the hours that the unemployed would work if they could find a job with the change in hours that those already in work would prefer. Thus it captures both the intensive and extensive margins of the labour market. …

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