Over ten per cent of Britain's possible labour is wasted

Combining underemployment and unemployment shows the output gap is much bigger than previously estimated.

Staff in a dispatch centre package goods to ship. Shift workers are frequently underemployed. Photograph: Getty Images

Our own economics editor, David Blanchflower, has a new paper out today co-authored with David Bell of the University of Stirling, taking a deeper look at underemployment.

Increasingly, the issue is being understood as one of the major crises in the UK today. It explains how our unemployment rates have recovered far more quickly than GDP growth would lead us to expect, as well as providing a hypothesis about the UK's falling productivity levels (if full-time permanent workers have are more productive than part-time and temporary workers, then high underemployment would hinder the UK's productivity).

While it's usually better to be under-employed than unemployed (because the number of people who are actually better off on benefits is vanishingly small), it's no walk in the park. At best, underemployment results in wasted potential in the same way as unemployment, with people who could work more not having the choice. And working for one day a week is much less than a fifth as good as working for all five: you can't buy a weekly travelcard, meaning commuting costs more; you can't build up expertise or connections at work; and you spend the vast proportion of your income on essentials, leaving little left over after the bills are paid (a problem that also afflicts people in full-time employment, of course).

On top of that, as Jonathan Portes points out, underemployment is an issue which overwhelmingly affects young people (of whom 1 in 5 are already unemployed):

In 2012, 30 per cent of those aged 16 to 24 that did have jobs wished to work longer hours. This means that the labour market for the young is even more difficult than the raw unemployment rates imply. Even if there was an upturn in demand, employers would likely extend the hours of existing workers before taking the risk of hiring new young employees.

But the thing is, despite underemployment being such an important issue, we don't have any great way to measure it. The unemployment figures include statistics asking people in part-time and temporary positions whether they'd rather be in full-time permanent jobs, which is a good start, but it's an overly simplistic measure (what about part-timers who want to stay part time but have more hours?), and it fails to properly capture the interplay between un- and under-employment.

Separately, the annual Labour Force Survey asks respondents whether they are looking for more hours of work at the same pay, and how many hours they are actually working; but those measures are even harder to compare to the unemployment data, and are far too infrequent to be of much use.

That's where Blanchflower and Bell step in. By combining those two measures with the general unemployment rate, they have put together an "underemployment" index. They write:

Like the unemployment rate, it is expressed as a percentage. It can be thought of as measuring the ratio of net unemployed hours to total available hours assuming that the hours preferences of the employed at current wages are met.

If everyone who was employed was working exactly the number of hours they wanted to be, then the index would be the same as the unemployment rate. In fact, it can fall below the unemployment rate, in times when the majority of employed workers would rather reduce their hours – and that's how it was in the boom years. But once the great recession hit, the index diverged markedly:

It's an important measure, because it reflects not only the "external" labour market that most of us see – unemployed people hunting for jobs – but also the "internal" labour market: people with work, negotiating with their employers for more or less work. As a result, the authors write:

This index gives perhaps a broader estimate of the extent of underused capacity in the economy – the output gap – than a simple measure based on the unemployment rate.

The policy implications, they write, are clear. Taking a narrow view, the ONS needs to pick up the ball on this, and start publishing the data alongside the broad unemployment index. But in the broader sense:

There is very substantial spare capacity in the labour market; the implication being that if demand were higher, output could easily be higher, and it could be higher without exerting any significant upward pressure on real wages. So any further stimulus, whether fiscal or monetary, would not be inflationary. People want to work.

Looking at underemployment as well as unemployment confirms that the stagnation Britain has experienced is unlikely to be purely, or even mainly, structural. Stimulus is likely to lead to more employment, not more inflation; and so it should be done as soon as possible.