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Ian Brinkley
Economic Advisor
Ian Brinkley

The latest quarterly data from the Bell-Blanchflower underemployment index

Authors: Ian Brinkley

27 June 2014

These new estimates from Danny Blanchflower and David Bell which are published here on The Work Foundation website confirm that there is plenty of spare capacity in the labour market. The ILO unemployment rate for the first quarter of 2014 was 6.8 per cent, but the “underemployment” rate is 8.4 per cent. The underemployment rate also allows for the extra hours that people in jobs would like to work after taking account of those who say they want to work fewer hours.
This gives us some idea of how much spare capacity there might be from employers offering more hours of work as the economy expands.

It is possible that the under-employment rate overstates spare capacity because some people might be responding to temporary pressures and the demand for extra hours would therefore fall more quickly as general prospects improve. However, over the recession and recovery the under-employment rate has tracked the unemployment rate reasonably closely, and there is no reason to think that this will not continue until the demand for extra hours returns to pre-recession levels. In the decade before the recession there was little difference between the unemployment rate and underemployment rate because those who wanted to work more hours were more or less balanced by those who wanted to work fewer hours, and it is likely this will be the case in the future.

The other indicator of spare capacity in the labour market is wages – and here average weekly earnings growth has been remarkably weak. Some of this is down to pay policy in the public sector but it is also completely consistent with there being significant spare capacity in much of the labour market. I expect stronger wage growth over the next year if unemployment continues to fall and skill shortages in some areas worsen, but it is unlikely to move back to pre-recession growth rates any time soon. The Bank has to worry about inflationary pressures from many quarters – not least the dysfunctional UK housing market and another surge in imported inflation from globally determined food and energy prices – but the labour market is not one of them.