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Ian Brinkley
Economic Advisor
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Ian Brinkley

Underemployment and the productivity paradox

Authors: Ian Brinkley Ian Brinkley

26 July 2013

The new blog from Danny Blanchflower is a timely reminder that the unemployment numbers do not tell the full story when it comes to measuring labour supply and demand. Together with Jonathon Portes, Professor Blanchflower has estimated the number of hours that people would like to work and the number of hours that employers are willing to pay for. This shows that there is much more “slack” in the labour market than the unemployment rate indicates.

Although few people nowadays can seriously think that inflationary pressure is likely to be generated in the labour market any time soon, these figures should remind policy makers and the members of the Bank of England’s monetary policy committee that there is even more spare capacity than we thought. Perhaps the Bank could go further and follow the Fed’s lead by saying explicitly that monetary policy is unlikely to tighten before unemployment or some other measure of labour market slack falls below a certain level.

What the figures do not help us much with is resolving the productivity paradox. It is clear that employers could easily have met the modest increases in aggregate demand since the end of the recession by giving people already in work more hours – which would have increased productivity - rather than take on more workers which has decreased productivity. Why employers chose more people rather than more hours is still unclear. And that means we face a major uncertainty about what will happen to unemployment if economic growth continues to strengthen. As Blanchflower notes, employers could decide they have all the workers they need, and meet future demand by increasing hours offered. In that case, the modest falls in unemployment seen to date would come to an abrupt halt.

The Bell and Blanchflower measure has not yet been calculated for other economies. However, there are other measures compiled by the OECD that confirm we have large numbers of people who are not counted as unemployed but who say they are available for work and are able to start a job if one were offered. In 2012 these “marginally attached workers” as the OECD describes them accounted for 1.6 per cent of the UK labour force (measured as the active labour force plus marginally attached workers) compared with 1.5 per cent in France, 1.4 per cent in Germany, and 1.3 per cent in Japan. The share was similar in the US.  Another reminder of just how far we have to go in increasing the demand for labour sufficiently to absorb the existing supply.

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