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.

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.

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

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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How a small tax rise exposed the SNP's anti-austerity talk for just that

The SNP refuse to use their extra powers to lessen austerity, says Kezia Dugdale.

"We will demand an alternative to slash and burn austerity."

With those few words, Nicola Sturgeon sought to reassure the people of England, Wales and Northern Ireland last year that the SNP were a party opposed to public spending cuts. We all remember the general election TV debates, where the First Minister built her celebrity as the leader of the anti-austerity cause.

Last week, though, she was found out. When faced with the choice between using the powers of the Scottish Parliament to invest in the future or imposing cuts to our schools, Nicola Sturgeon chose cuts. Incredible as it sounds the SNP stood shoulder to shoulder with the Tories to vote for hundreds of millions of pounds worth of cuts to schools and other vital public services, rather than asking people to pay a little bit more to invest. That's not the choice of an anti-austerity pin-up. It's a sell-out.

People living outside of Scotland may not be fully aware of the significant shift that has taken place in politics north of the border in the last week. The days of grievance and blaming someone else for decisions made in Scotland appear to be coming to an end.

The SNP's budget is currently making its way through the Scottish Parliament. It will impose hundreds of millions of pounds of cuts to local public services - including our schools. We don't know what cuts the SNP are planning for future years because they are only presenting a one year budget to get them through the election, but we know from the experts that the biggest cuts are likely to come in 2017/18 and 2018/19. For unprotected budgets like education that could mean cuts of 16 per cent.

It doesn't have to be this way, though. The Scottish Parliament has the power to stop these cuts, if only we have the political will to act. Last week I did just that.

I set out a plan, using the new powers we have today, to set a Scottish rate of income tax 1p higher than that set by George Osborne. This would raise an extra half a billion pounds, giving us the chance to stop the cuts to education and other services. Labour would protect education funding in real terms over the next five years in Scotland. Faced with the choice of asking people to pay a little bit more to invest or carrying on with the SNP's cuts, the choice was pretty simple for me - I won't support cuts to our nation’s future prosperity.

Being told by commentators across the political spectrum that my plan is bold should normally set alarm bells ringing. Bold is usually code for saying something unpopular. In reality, it's pretty simple - how can I say I am against cuts but refuse to use the powers we have to stop them?

Experts - including Professors David Bell and David Eiser of the University of Stirling; the Resolution Foundation; and IPPR Scotland - have said our plan is fair because the wealthiest few would pay the most. Trade unions have backed our proposal, because they recognise the damage hundreds of millions of pounds of cuts will do to our schools and the jobs it will cost.

Council leaders have said our plan to pay £100 cashback to low income taxpayers - including pensioners - to ensure they benefit from this plan is workable.

The silliest of all the SNP's objections is that they won't back our plan because the poorest shouldn't have to pay the price of Tory austerity. The idea that imposing hundreds of millions of pounds of spending cuts on our schools and public services won't make the poorest pay is risible. It's not just the poorest who will lose out from cuts to education. Every single family and business in Scotland would benefit from having a world class education system that gives our young the skills they need to make their way in the world.

The next time we hear Nicola Sturgeon talk up her anti-austerity credentials, people should remember how she did nothing when she had the chance to end austerity. Until now it may have been acceptable to say you are opposed to spending cuts but doing nothing to stop them. Those days are rapidly coming to a close. It makes for the most important, and most interesting, election we’ve had in Scotland.

Kezia Dugdale is leader of Scottish Labour.