24 September 2018

Has unemployment been replaced by underemployment?


In a recent research paper, the economists David Bell and Danny Blanchflower insist that the persistence of low wages in the UK and US is a result of unemployment being replaced by underemployment.

Instead of surplus labour rotting on the dole, people instead find themselves in temporary and part-time jobs. Reluctant though I am to take him seriously, Blanchflower might be on to something, so it’s worth testing their hypothesis.

As background we need something called ‘nairu’, the non-accelerating inflation rate of unemployment. If everyone is employed then extra labour can only be gained by tempting it away from other employers – something Marx himself noted. That competition for labour is what raises wages. If there’s a huge reserve army of unemployed people competition for labour is minimal, meaning there is no incentive for employers to raise wages. Nairu describes the rate of unemployment where rising wages begins to feed through into inflation – where the reserve army of people looking for work is exhausted, if you like.

The business cycle is also important to bear in mind. As inflation starts to occur then central banks tend to raise interest rates to curb it. This also curbs the growth of the economy or in the worst cases reverses it – we end up with a recession as a result of curbing inflation.

Add these two phenomena together and we get one of the interesting macroeconomic questions of our times: at what rate of unemployment should the Bank of England or the Federal Reserve be raising interest rates to choke off inflation? Here in the UK unemployment is at its lowest since the early 1970s and the employment-to-population ratio is at its highest level since then too.

By our conventional measures of these past few decades inflation should already be here. But not only is the inflation not here (the price rises we are seeing are mainly from the fall in the pound, a very different phenomenon), but we’re not seeing the wage rises which should presage it. You might have noted people complaining about that lack of rising real wages.

Bell and Blanchflower’s point, and it could well be a fair one, is that unemployment has been replaced with underemployment. Instead of doing nothing, workers are doing odds and sods for minimal income.

If this were true, what would it imply about the economy? Our aim with an economy in the first place is for us all to be as rich as we can be given the constraints of reality around us. We really do want economic growth and therefore it would be best to reduce the number or length of times that the central bank reverses it to kill inflation. Put simply, we want a low nairu so that economic expansions can run for longer and we all get richer without the risk of inflation running away.

And this isn’t some neoliberal invention, we can derive it from the work of the Labour peer Richard Layard in the 1980s, or from arguments made by the left-wing economist Paul Krugman. A low nairu is a good thing.

Blanchflower’s assertion is that nairu has fallen, by replacing complete unemployment with underemployment. Further, if that reserve army is at least doing something rather than nothing we’re collectively richer by their output, minimal though it may be. Something is more than nothing after all – the same is true of the welfare bill, claimants having some income reduces their reliance on the state to support them.

But the fact nairu has fallen should be seen as a good thing. It follows that whatever it was that made nairu fall was good policy. Remember that this isn’t some God-ordained attribute of an economy, it’s an output of the structure of the labour market, which has gone through great upheaval in the last few decades.

Thanks to the reforms of the 1980s we’ve done our best to kill off union power, lower protections against being fired and made it easier for people to work part time, casually. The latest manifestation of this phenomenon is, of course, the gig economy – low on job security but very high indeed on flexibility.

It is these very things which have led to a lower nairu, allowing interest rates to stay lower for longer, the economic expansion to continue to ever greater sunny uplands of greater societal output and wealth.

In short, that neoliberal slaying of worker protections was all a Good Thing. Interesting what we can find out by taking Danny Blanchflower seriously, isn’t it?

Tim Worstall works at the Continental Telegraph and the Adam Smith Institute.