Underemployment Is Also the Right Target (Not Just Unemployment)

April 8th, 2013 at 3:27 pm

If we wanted to target the persistent slack in the labor market, though I can’t see any signs that we do, we shouldn’t just target the unemployment rate; we should also go after the underemployment rate.  Since it captures the important dimension of not just do you have a job, but are you getting the hours of work you want, it’s a more comprehensive measure of the extent to which workers are underutilized–i.e., slack–in the labor market.

The difference is pretty well known by now: the underemployment rate includes various groups of underutilized workers or job seekers who are left out of the official rate.  The largest difference is the inclusion of part-time workers who would rather have full-time jobs.  Most recently, there were about eight million such folks, elevating this measure of underutilization to around 14% compared to about 8% for unemployment (2013Q1).  Other components of this rate include discouraged workers who’ve recently looked for work but given up, and some other smaller groups that are neither working nor looking for work but remain marginally attached to the job market.


Source: BLS

As the figure shows, underemployment went up more in percentage point terms over the recent downturn, and has come down a bit faster.  But the question I’m asking here is which measure better represents labor market slack, and a little test for that is which one correlates more with real wage movements?

You can’t easily do that with the annual national data because the underemployment rate is only available since 1994 so you don’t have a lot of observations, and because it correlates highly with unemployment, so at too aggregate a level it doesn’t add much explanatory power.  But luckily, based on some preliminary work I’m doing with some colleagues to update this book, we’ve got a data set tracking state wage and job market data over time.

In that context, when you let un- and underemployment fight it out by putting both in a regression to predict 20th percentile real hourly wages, underemployment wins by a TKO: the unemployment variable has the “wrong” sign and is statistically insignificant.  If you run them separately (see table), underemployment has a larger, more significant coefficient and explains more of the variance.


Where does this lead you in terms of thinking about policy?  It’s obvious, but people don’t just need jobs—they need hours.  Sure, not everyone—it’s important to have ample part-time opportunities for those who want them (and work-sharing, which reduces workers’ hours, is a very good idea in the heat of recession).  But while unemployment is a bigger problem—paycheck>no paycheck—underemployment is also a big deal.

The number of involuntary part-timers has been drifting down and is 1.2 million, or 13% below its peak at the end of 2009, as employers tend to extend hours before hiring new workers (for this reason, btw, underemployment is a leading indicator of unemployment).  But the pace of further progress is going to be a function of aggregate demand, and that’s been a shaky proposition of late.

[Note: Of course, the employment rate is also highly germane in this context because unlike un-  and underemployment, it doesn’t deceptively look “better” when people give up looking for work and leave the job market, as happened just last month.  On the other hand, any employment, even involuntary part-time work, is counted the same in the employment rate, so there’s another reason to track and target underemployment.]



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3 comments in reply to "Underemployment Is Also the Right Target (Not Just Unemployment)"

  1. Marie Burns says:

    I agree that underemployment is a big deal. I know there’s a lot of anecdotal evidence that companies keep people as part-timers (I have friends in that boat) on purpose so they won’t have to pay them benefits that come with full-time employment. I wonder if that sort of company policy & practice has been quantified, as squishy as the numbers might be.

    The Constant Weader at http://www.RealityChex.com

  2. Perplexed says:

    -“Where does this lead you in terms of thinking about policy?”

    Maybe we should start at the very beginning. What underlies these basic concepts of “labor market,” “unemployment,” and “underemployment”? If economics is actually a science, shouldn’t there be rather strict definitions of what a “market” is? What’s the technical, scientific definition of “sticky prices” and “bubbles”? If we selected 15% of wheat growers and told them to let their wheat rot in the fields because we weren’t going to allow them access to the market, would we call them “ungrowers”? Shouldn’t unemployment be called something more descriptive of what it is, like “workers excluded from the market” or “cast aside labor” or some other name that is indicative of the fact that these potential workers are the victims of system that will not even allow them to place their bid in an “open market”? You’d think that, in this age of “political correctness,” it would be unacceptable to victimize people and then attach a label to them indicating that there is something wrong with them. We force them to absorb the entire cost of the output gap and then insult them as if they were the problem. Even the most primitive societies would divide up the labor and make it possible for everyone to eat and have shelter. How far we’ve come right?

    This meme couldn’t exist without economists giving it legitimacy and laws that exempt labor from anit-trust prohibitions. What if our Constitution protected us against the tyranny of the majority in this incredibly important aspect of our lives and it wasn’t legal to dump the entire cost of the output gap on a minority that is absolutely powerless to resist? What would the alternatives be?

    What is the source of the notion that “unemployment” is some kind of “natural market outcome” and do economists have any responsibility for the massive suffering that results from the wide acceptance of this “principle” and the laws that have been put in place to defend it?

    Regardless of whether the source of the output gap is “supply side” or “demand” side factors, solving the problem by preventing access to the market by a powerless few in an effort to prevent wages dropping is indefensible. Removing this option would force society to solve the problem in some other, more humane, way; and focus everyone on finding a solution as no one would be insulated from the damages. What would we be doing if the option to “stick it to the powerless few” wasn’t available?

  3. Kevin Rica says:

    Don’t worry! Right now we have four senators from each of our two great parties (the one that hates free markets because they think markets are an excuse for the rich to rip off the poor and the other one that loves free markets because they think that free markets are an excuse for the rich to rip off the poor — I forget which is which — Does it matter?) assembling a back-room deal that nobody can amend. This deal will make sure that we have enough immigrants to pick crops at poverty-level wages so that wages don’t rise.

    After all, don’t you believe farmers when they say that they underpay their workers so that they can pass the savings onto you?

    After all, if we don’t have enough jobs, don’t we need more workers?