Underemployment Takes An Outsized Toll On The Economy, According To A New Study
If you look at official overall unemployment numbers, conditions in the U.S. look great. That’s on the whole, though. Rates vary wildly by age, race, gender, and level of education.
The unemployment numbers are also complex. The figures have frequently dropped because people leave the roles of the working, whether because they’ve retired, headed back to school, or simply didn’t fulfill an official definition of looking for work within the requisite four-week period of a survey. (Looking at newspaper or online ads without the submission of an application doesn’t count.)
The Bureau of Labor Statistics has multiple definitions of unemployment available. The “official” one, the U-3, fails to count multiple categories of people as unemployed, including those who could work but have given up and people who work part-time because they can’t find enough hours.
Some economists — David Bell of the University of Stirling in the U.K. and David Blanchflower and Bruce Rauner of Dartmouth College in the U.S. — have looked at that last group, both in the U.S. (where it’s called part-time for economic reasons) and Europe. Their take is that the issue of underemployment is a much bigger drag on the economy and, by logical extension, one significant driver of income inequality because it helps explain low wage growth.
Their research claims that “underemployment replaces unemployment as the main influence on wages in the years since the Great Recession.”
People who are underemployed, typically in lower-paying positions, become a wage buffer for employers. Rather than hire more people and, in the face of competition, offer more money, they can provide additional hours to part-time people who badly want more work. Those people don’t have the flexibility to demand more money. They take the hours they can get or risk losing the ones they’ve had. Or, as the authors explain it:
Even though the unemployment rate has returned to its pre-recession levels in a number of countries, the underemployment rate has not. This is especially marked in the UK and the USA where the unemployment rate is close to 4%. As we will show, in a number of countries, and especially in the Euro zone, which has an unemployment rate of 8.5% in March 2018, both the underemployment and unemployment rates remain above prerecession levels. Examples of countries that still have elevated unemployment rates are France, Greece; Spain and Italy, all of which have unemployment rates of over 8%. Labor market slack, we contend, continues to reduce wage pressure across advanced countries.
The underemployed become an economic shock absorber of labor demand for employers.
In the August 2018 employment situation report, the BLS listed the number of unemployed persons as 6.2 million. That is according to the U-3 definition. The U-6 number is 7.4 million.
The number of people employed part-time for economic reasons, or involuntary part-time workers, was 4.4 million. That is nearly 71% of the lower estimates of the number who are unemployed.
The relationship between the officially unemployed (7.1 million) and the involuntarily underemployed (4.5 million) was different in August 2007, before the recession. The underemployed were 63% of the unemployed number. Also, the absolute number of underemployed is still about the same rate as then, even though the total of unemployed is significantly lower.
The problem extends well beyond the U.S., as well.
At stake is economic decisions, like those taken by the U.S. Federal Reserve Bank and the Bank of England, as one of the paper’s authors told Business Insider.
In fact, central banks like the Bank of England and the US Fed are fundamentally misunderstanding what is happening to employment, and are making bad interest rate decisions based on these misleading signals, Blanchflower says. The low unemployment rate makes it look like the economy is at full employment. So central banks are raising rates in order to snuff out the inflationary effects that workers’ wage demands usually have in such boom times. But because the role of unemployment has been largely replaced by the role of underemployment, we are not at “full employment” — and wage rises are not imminent.
Given the definitions of unemployment used in the U.S., there is likely even more slack. People lose jobs that once paid enough to live on, didn’t learn new skills, were laid off, and that was it. Tightening labor supply, according to the economics and recruiters I’ve spoken with, is a bifurcated process. With in-demand skills, you can do well. Without, you can’t.
Perhaps the BLS should take the advice from this paper and consider a new measure of unemployment: a U-7 figure that looks at underemployment as a portion of employment. Otherwise, the Fed’s governors may assume the economy and labor markets are in strong position and make important decisions based on faulty assumptions.
About Jaime Bonetti Zeller
Jaime Bonetti Zeller is an investment professional and entrepreneur with businesses in multiple industries. He is president of Servicios Consulares Eurodom, the local partner in the Caribbean region for VFS Global, a leader global outsourcing and technology services specialist for diplomatic missions and governments worldwide. Jaime Bonetti Zeller also started the company Sofratesa de Panama inc., an organization in the engineering services industry located in Panama City.