[My CBPP/Full-employment-project colleague Kathleen Bryant has a new paper coming out next week with Dartmouth econ professor Danny Blanchflower (et al) on measures of labor market slack and their correlation with wage growth. A key focus of the paper involves the underemployment rate, and since we learned today that u6 hit a cyclical low last month, I asked Kathleen to dash off a note to get folks ready for the paper’s release.]
By Kathleen Bryant:
Today’s jobs report showed that the U6 rate – a measure of underemployment including the unemployed, involuntary part-time workers, and those who aren’t currently employed or job-hunting but still interested in working – hit its lowest level since December 2000, at 7.1%. While the unemployment rate is the slack variable that receives the most attention from economists and the popular press alike, Professor David Blanchflower (of Dartmouth University) and I argue in a forthcoming paper (out next week!) that monetary policymakers should pay more attention to the underemployment rate as they assess whether the macroeconomy still has “room to run.”
We analyzed Labor Force Survey (LFS) data in the U.K. from 2002-2017, and we regressed wage growth on unemployment and underemployment rates to test whether one measure of slack exerts more influence on wage gains than the other. We quantify underemployment in the U.K. using an index that starts with the unemployment rate and factors in the aggregate number of reductions and additions in work hours preferred by workers.
In the wage equations, we found that the coefficients on underemployment were large and consistently significant while the coefficients on unemployment were small and insignificant, suggesting that underemployment has a much stronger relationship with wage growth. Monetary policymakers that monitor the relationship between unemployment and wages (known as the “Wage Phillips Curve”) should therefore rewrite the Phillips Curve into the underemployment space.
Furthermore, we emphasize the importance of focusing on underemployment using a somewhat unorthodox data source in the monetary policy literature – survey data on mental health found in the U.K.’s LFS. We find that the underemployed consistently score lower on measures of happiness, satisfaction, and life worthwhileness and higher on an anxiety measure than full-time workers or those working part-time voluntarily. We also find that the incidence of depression has increased more rapidly since 2011 among under-employed workers than among all workers on average. These findings illustrate the consequences of a labor market with too much slack at a personal level, beyond the traditional macroeconomic consequences that are commonly studied.
If you’re interested in more discussion of Phillips Curves, underemployment, and survey data on psychological wellbeing, we hope you’ll read our paper – “A Case for Full Employment: Underemployment, The Falling NAIRU and the Costs of Excess Slack,” which will be published through CBPP’s Full Employment Project next week.
[JB here again. Here’s a figure related to this stuff. I ran a very simple model to predict wage growth–yr/yr % change regressed on slack variable and two lags of DV–and ran the model through Jan 2010, forecasting thereafter. The forecasts aren’t that different, but towards the end of the series, the unemployment rate over-predicts wage growth relative to the under-employment rate, which is what Blanchflower/Bryant would predict.]