“Underemployment”: Misleading unemployment numbers are prompting the Fed and the Bank of England to make a huge errors

Martha Soukup /
Flickr, CC

• There is almost zero wage growth in the US and the UK,
  even though there is full employment.
• That is unexpected, because a tight labour market
  usually drives up wages. So what is going on?
• New data in a research paper for the National
  Bureau of Economic Research suggests the wage-dampening effect
  of mass unemployment has been overtaken by the underemployment
  of the gig economy.
• The paper’s author told Business Insider that the US
  Fed and the Bank of England don’t understand this, and are
  raising interest rates on false assumptions about what is
  really going on in the labour market.

One of the central mysteries about the economy right now is why
there is so little growth in wages even though unemployment is
low. Normally, when there is full or near-full employment,
salaries and pay packets rise as employers find it harder to find
and keep their workers. But that is not happening. Real wage
growth after inflation is just
-0.1% in the UK and
1% in the US.

This chart shows just how pitiful wage growth in the US is:

Bureau of
Labour Statistics

The US and the UK both have very low unemployment, 4% and 3.9%
respectively. They are record lows. Technically, we have full
employment in both countries and much of Europe.

So what is going on?

NBER

Why isn’t full employment making workers richer?

Economists David N.F. Bell and David “Danny” Blanchflower have
published new evidence showing that the official statistic for
“unemployment” is now a misleading indicator of what is actually
happening to workers who are trying to find jobs.

In a research paper
for the National Bureau of Economic Research published in
August, they write that “unemployment” (where workers have no
job whatsoever) has been largely replaced by
“underemployment” (where workers have poorly paid part-time jobs
and can’t make enough money to meet their needs). Receiving
unemployment benefits has been replaced by working 20 hours a
week in an Amazon warehouse, in other words.

• US increase in underemployment, pre-Great Financial
  Crisis to now:
• April 2006: 3.1 million
• Sept 2010: 9.25 million
• July 2018: 4.56 million
• Increase over the period: 1.46 million, up 47%

Wages are not rising, Blanchflower and Bell say, because whenever
employers need new workers they can increase the hours of these
part-timers rather than create new jobs.

Historic UK unemployment
rates.
UK Office for National
Statistics

This sounds like a technical distinction but it has potentially
huge consequences, Blanchflower tells Business Insider.
Governments and politicians tout their records on reducing
unemployment. The unemployment rate is a key measure of economic
success. Central banks often “target” an unemployment rate as
part of their dual mandate to control inflation and support jobs.

What if they’re wrong?

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.

• UK increase in underemployment, pre-Great Financial
  Crisis to now:
• April 2008: 696,000
• April 2013: 1.46 million
• April 2018: 991,000
• Increase over the period: 295,000, up 42%

NBER

“Central banks think they are at full employment and they’re
raising rates and that’s a mistake,” Blanchflower says. “That’s a
major error of policymaking and thinking.”

When central banks make mistakes — as they did prior to the
2000 and 2008 crises — it can trigger recessions.

Blanchflower’s comments should be taken seriously. He is a former
member of the Bank of England’s Monetary Policy Committee (MPC),
the panel that sets interest rates in the UK, in addition to
being an economics professor at Dartmouth College. He told
Business Insider that at least one current member of the MPC
called him recently to discuss this research.

The data may contradict the Bank of England’s official view

The BOE may be making a new mistake if Blanchflower’s data is
correct and the BOE’s view is wrong. The pair have opposing views
of what the data says: In the
BOE’s most recent inflation report, dated September 13, the
Bank said it believed there was “a very limited degree of slack
remaining” in the labour market. (“Slack” is the official term
that describes jobless people who might yet be drawn into the
workforce.) Blanchflower’s study says the opposite:
There is plenty of slack, and it is all in the form of
part-time workers who aren’t earning enough.

“Even though the unemployment rate has returned to its
pre-recession levels in many advanced countries, underemployment
in most has not,” his study says. “Underemployment replaces
unemployment as the main influence on wages in the years since
the Great Recession.”

Blanchflower and the Bank of England cannot both be right

One of them is wrong.

Previously, I have argued that
the way the government, the media and economists focus on the
headline unemployment rate but ignore the underemployment rate
constitutes a “lie” because “unemployment” significantly
underplays the actual lack of work available for workers who want
it — and because the powers that be all know it but rarely
talk about it.

Blanchflower disputed my use of the word “lie,” calling it
“ridiculous.”

Fair enough.

“They’re trying to create unemployment”

But in a conversation with me last week he sounded alarmed at
just how severe the misunderstanding among policymakers is on the
effect underemployment has on wages. It is not simply that
low “unemployment” makes the economy look good when it’s actually
disguising historically high “underemployment.”

It is worse than that: When the Fed and the BOE raise
interest rates, they are essentially trying to generate extra
unemployment in order to stave off future wage increases.

“They’re raising rates because they think wages are set to
explode [in the UK and US] … in both cases they’re trying to
create unemployment,” Blanchflower says. 

So in theory, it’s not just that wage growth is nonexistent. It’s
that the central banks of the UK and US may be about to make the
situation worse if they’re reading Blanchflower’s data wrong.