Underemployment in the UK in the Great Recession

Article excerpt

One of the main puzzles associated with the Great Recession has been the muted increase in recorded unemployment in the UK. In this paper we explore possible explanations for the behaviour of the UK labour market during the period of the recession. We establish that there has been significant underemployment, which partly explains the sluggish increase in unemployment, but also means that (i) significant numbers of workers are supplying fewer hours of work than they would like and (ii) when recovery comes, profit maximising employers are likely to increase the hours of existing workers, rather than making new hires. This particularly disadvantages the young. Our new analysis points to significant levels of underemployment among younger age groups--whether this is measured in relation to their actual hours of work, their desired hours of work, or their labour force participation.

Keywords: Unemployment; underemployment

JEL Classifications: J23; J64

I. Introduction

In an article in the previous edition of this Review we examined growth in unemployment in the Great Recession that started in Spring 2008 (Bell and Blanchflower, 2010c). In that paper, we showed that the incidence of unemployment had fallen especially hard on the young. We documented the characteristics of the unemployed and reported how they have particularly low levels of well being, are depressed, have low levels of life satisfaction, and are especially likely to be in financial difficulties. This work built on our previous research on youth unemployment and the Great Recession (Bell and Blanchflower, 2009a, 2009b, 2010a and 2010b).

In our earlier paper we also highlighted those who said they worked part-time because there were insufficient full-time jobs available, as well as those who said they would prefer to work more hours, i.e. those who were underemployed. We found that members of this group were more likely than other workers to say they were depressed. In this paper, we examine the evidence relating to such underemployment alongside evidence of an increase in temporary jobs when permanent jobs are preferred. As well as examining trends in underemployment, we try to identify the individual characteristics that have been associated with underemployment during the recent recession. We also look at evidence of discouraged worker effects where individuals leave the labour force despite the fact that they want jobs. We begin by examining past analyses of labour market adjustment during a cyclical downturn.

One framework for the analysis of underemployment is the disequilibrium analysis of factor demands, where adjustment costs prevent immediate adjustment to a new equilibrium following a shock to demand. Notable contributions to this literature were made by Ball and St Cyr (1966); Brechling (1965); Nadiri and Rosen (1974) and Hazeldine (1980). In their models, firms typically minimise costs subject to a production constraint that takes account of the costs of adjusting stocks of labour and capital. After an unexpected demand shock, cost-minimising firms may initially adjust utilisation rather than the stocks of these factors. In the labour market, this implies that firms would cut workers' hours before reducing employment. This requires there to be some contractual flexibility in setting hours of work. And from the workers' perspective, the hours adjustment, though not optimal, may be regarded as the least bad alternative.

The relative size and speed of the adjustments of hours and employment depend on their relative costs. Firms will account for the costs of training, hiring, firing and payroll taxes when adjusting the stock of workers. The costs of firing include statutory redundancy payments, which increase with tenure. Thus it typically costs more to terminate an older worker than a younger one. The costs of adjusting hours partly reflect the premium wage rates that are payable outside contracted hours. …