The extent of labor market slack in the UK economy is an ongoing question given the recent unexpectedly rapid fall in the unemployment rate. In the latest data release for February–April, which is referred to as March 2014, it was 6.6 percent, down from 7.9 percent in May 2010 and 7.8 percent in March 2013. However, other measures of labor market slack suggest that the UK economy is still a long way from its full employment level. First, the number of workers in temporary jobs who could not find permanent jobs is up from 565,000 in May 2010 to 601,000 in April 2014. Second, the proportion of workers who are self-em- ployed is up from 12.9 percent in September 2008 to 14.9 percent now. This is a concern given we know that these jobs on average tend to be low paid, and there is no evidence that a higher self-employment rate is correlated with better macroeconomic outcomes (Blanchflower 2004). Third, the number of part- time workers who would like to be full-time is up from a low of 670,000 in April 2008, and up further from 1,072,000 when the coalition was formed, in May 2010, to 1,400,000 in the most recent Office for National Statistics (ONS) Labour Market Statistics, June 2014. Long-term unemployment, as measured by those who have been continuously unemployed for at least a year, is up from 381,000 and just under 800,000 both in May 2010 and at the time of writing. The big question is, how far is the UK economy from full employment, when it would be expected that nominal wage increases would start to rise sharply?
This paper examines the amount of slack in the UK labor market and finds the downward adjustments made by the Monetary Policy Committee (MPC) to both unemployment and underemployment invalid. Without evidence to support its assessment of the output gap, the MPC reduces the level of unemployment based on its claim that long-term unemployment does not affect wages. The authors produce evidence to the contrary and present arguments on why the MPC’s halving of the level of underemployment in the United Kingdom is inappropriate. Bell and Blanchflower set out arguments on why they believe the level of slack is greater than the MPC calibrates. Consistent with that is the fact that real wages in the United Kingdom continue to fall.
Our paper contests the view that the long-term unemployed, because of their supposed greater distance from work, should be treated as a different category when assessing the level of slack in the UK labor market. Microeconometric evidence from the United States and our evidence from the United Kingdom, cannot distinguish any statistically significant difference between long-term unemployment and overall unemployment in their effects on wages. There is zero empirical justification for focusing only on the short- term unemployed when calibrating slack in the UK labor market.
Chosen excerpts by Job Market Monitor. Read the whole story at WORKING PAPER 14-2: Labor Market Slack in the United Kingdom.