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wp13-7

wp13-7

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WP 13-7 AUGUST 2013
Working Paper
S e r i e s
1750 Massachusetts Avenue, NW Washington, DC 20036-1903 Tel: (202) 328-9000 Fax: (202) 659-3225 www.piie.com
How to Measure Underemployment?
David N. F. Bell and David G. Blanchfower
Abstract
One o the actors that may inhibit reductions in unemployment as the economy recovers is the extent to which existing  workers would like to work more hours and employers may preer to let them work longer hours beore making new hires. Tis phenomenon suggests that the unemployment rate does not capture the ull extent o excess capacity in thelabor market. But how should it be measured? In this paper we argue that the United States does not have the necessary statistical tools to calibrate this orm o underemployment. We describe an index that captures the joint efects o unemployment and underemployment and provides a more complete picture o labor market excess capacity. We show how this index can be implemented using British data and describe its evolution over the Great Recession. Comparisonso our index with unemployment rates suggest that unemployment rates understate diferences in labor market excesscapacity by age group and overstate diferences by gender. We also show that being unable to work the hours that onedesires has a negative efect on well-being. Finally, we recommend that the Current Population Survey conducted by theUS Bureau o Labor Statistics might be extended to enable the construction o an equivalent US index.
 JEL codes:
J01, J11, J21, J23, J38, J64
Keywords:
underemployment, unemployment, excess capacity, labor market
David N. F. Bell
is proessor o economics at the University o Stirling, Scotland. He is research ellow at the Institute orthe Study o Labor (IZA), University o Bonn, Germany, and a researcher at the ESRC Center or Population Change,University o Southampton, England. He is also a ellow o the Royal Society o Edinburgh. He has written extensively on labor economics, with a particular ocus on working time. His other contributions span the economics o social care,health economics, and the economics o constitutional change. He has made many contributions to the public debate onthese issues both through the media and in an advisory capacity to government.
David G. Blanchfower
, nonresident senior ellow at the Peterson Institute or International Economics, has been theBruce V. Rauner Proessor o Economics at Dartmouth College since 2001. He was member o the Monetary Policy Committee, Bank o England, rom June 2006 to June 2009. He was made a Commander o the British Empire (CBE)in the Queen’s Birthday Honours List in June 2009 or services to the Monetary Policy Committee and economics.He is also research ellow and director o the Future o Labor Programme at the Institute or the Study o Labor (IZA),University o Bonn, Germany; proessor o economics (part-time) at the University o Stirling, Scotland; visiting scholarat the Federal Reserve Bank o Boston; research associate at the National Bureau o Economic Research; economicseditor or
New Statesman
; V contributing editor or Bloomberg V; and economics columnist or the
Independent 
.His areas o research include unemployment, well-being, and wage macro policy. He has written extensively on wages,
 
2
unemployment, especially youth unemployment, sel-employment, credit constraints, and well-being. His book 
Te Wage Curve 
(1994, MI Press), coauthored with Andrew J. Oswald, was awarded Princeton University’s Richard A.Lester Prize or the Outstanding Book in Industrial Relations and Labor Economics. He was named the BusinessPerson o the Year by the
Daily elegraph
in 2008.
Copyright © 2013 by the Peterson Institute or International Economics. All rights reserved. No part o  this working paper may be reproduced or utilized in any orm or by any means, electronic or mechanical, including  photocopying, recording, or by inormation storage or retrieval system, without permission rom the Institute.Tis publication has been subjected to a prepublication peer review intended to ensure analytical quality. Te views expressed are those o the author. Tis publication is part o the overall program o the Peterson Institute or International Economics, as endorsed by its Board o Directors, but it does not necessarily refect the views o individual members o the Board or o the Institute's sta or management. Te Institute is an independent, private, nonprot institution or rigorous,intellectually honest study and open discussion o international economic policy. Its work is made possible by nancial support rom a highly diverse group o philanthropic oundations, private corporations, and interested individuals, as well as by income on its capital und. For a list o Institute supporters, please see www.piie.com/supporters.cm.
 
3
INTRODUCTION
Despite growth in employment, unemployment rates in the United States have been slow to all over thelast couple o years. Te growth in nonarm payrolls has averaged 191,000 a month over the last year, butthe number o unemployed has allen only by about 81,000 a month. Tis slow decline is in large partdue to nonparticipants (so-called inactives) entering the labor orce and taking up jobs. In other words,those who were not counted in the labor orce (i.e., who had dropped out o the labor orce) are theones taking up jobs, not those actively looking or employment, thus slowing the rate o unemploymentdecline. Te six measures o underutilization the Bureau o Labor Statistics publishes called U-1 throughU-6—the unemployment rate is U-3—have all been slow to move. O interest is the act that all six moved pretty closely together (see table 1). Te bad news is that it will be especially hard to get theunemployment rate down, but the good news is that wage pressure is unlikely to rise anytime soon.
1
 Te Federal Open Market Committee (FOMC) is continuing to stimulate the economy throughquantitative easing and low interest rates. It is, however, perectly possible that unemployment rates willtake much longer to get down to 7 percent or even 6.5 percent i nonparticipants continue taking jobs.Te Fed has set criteria to slow stimulus by tapering asset purchases
2
and raising interest rates.
3
It is alsopossible that workers (i.e., those in the labor orce) are hours constrained and when the recovery takeshold, rather than rms hiring new workers, especially unemployed workers, we will see an increase inexisting workers’ average number o hours.
 
 According to latest data available, average weekly hours o all
1. Christopher Erceg and Andrew Levin (2013) argue that nonparticipants have been pushing down on wages. In a orthcoming paper David Blanchower and Adam Posen provide supporting empirical work to suggest that is indeed thecase.2. In testimony beore Congress on July 17, 2013, Chairman Ben Bernanke explained the path o tapering o assetpurchases was dependent on improvements in the labor market, "I the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace o purchaseslater this year. And i the subsequent data continued to conrm this pattern o ongoing economic improvement andnormalizing ination, we expected to continue to reduce the pace o purchases in measured steps through the rst hal o next year, ending them around midyear. At that point, i the economy had evolved along the lines we anticipated,the recovery would have gained urther momentum, unemployment would be in the vicinity o 7 percent, and ination would be moving toward our 2 percent objective." See testimony at www.ederalreserve.gov/newsevents/testimony/bernanke20130717a.pd.3. In the minutes o its June 2013 meeting the FOMC said "in particular, the Committee decided to keep the target rangeor the ederal unds rate at 0 to 0.5 percent and currently anticipates that this exceptionally low range or the ederalunds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent, ination between oneand two years ahead is projected to be no more than a hal percentage point above the Committee’s 2 percent longer-run goal, and longer-term ination expectations continue to be well anchored. In determining how long to maintaina highly accommodative stance o monetary policy, the Committee will also consider other inormation, including additional measures o labor market conditions, indicators o ination pressures and ination expectations, and readingson nancial developments.” See the minutes o the FOMC meeting at www.ederalreserve.gov/monetarypolicy/les/omcminutes20130619.pd.

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