A New Underemployment Index for Scotland

by David Bell and David Blanchflower

Part of the ESRC project on the Economics of Constitutional Change involves the collection of new data on the Scottish economy. This post develops this objective by describing a new measure of excess capacity (slack) in the Scottish labour market.

We have been working on measures of labour market excess capacity for some time and have focussed on the notion of underemployment.  This is a broader concept than unemployment which captures only the willingness of those who are not currently employed to supply work. The unemployment rate takes no account of the extra hours of work that some of those who are already employed would like to work. These hours are included in our more general measure of slack in the labour market.

The underemployment rate would be the same as the unemployment rate if all workers were happy with the hours they were being offered. But if they would like to work longer hours, the underemployment rate rises because there is more unfulfilled demand for extra hours (excess capacity) in the economy. If they would like to work fewer hours, the unemployment rate overstates the amount of excess capacity in the labour market. Typically older and male workers want to work fewer hours, while younger and female workers want more hours.

We have developed our measure of the underemployment rate in two previous papers, one published by the National Institute of Economic and Social Research and one by the Peterson Institute. The result is the Bell-Blanchflower underemployment index which uses individual data from the UK Labour Force Survey to modify the unemployment rate by taking account of the net change in working hours that existing employees say they would like to work.

The Bank of England published this index for the UK in its Inflation Report August 2013  (Table 3.A) and suggested that it reinforced the view that there is “a substantial margin of slack” [in the UK labour market] (Inflation Report August 2013 P30).  This matters to the Bank of England because its key duty is to control domestic inflation. Historically wage pressure was one of the major push factors behind increased inflation in the UK. But the ability to push for higher wages depends very much on the level of excess capacity in the labour market. The greater the excess capacity in the labour market, the weaker is the position of those seeking higher wages.

If Scotland were to become independent, it would likely have a central bank playing a similar role to that of the Bank of England. It would wish to assess the outlook for inflation in the Scottish economy. Clearly, the state of the labour market would be an important component of that assessment. Our argument would be that a measure of underemployment should form part of the analysis of the labour market. To determine how such an index might behave, we have used individual data from the Labour Force Survey to calculate our underemployment index for Scotland from 2001 to 2013. It is shown in Figure 1 alongside the unemployment rate and the equivalent rates for the UK as a whole. Table 1 shows the data on which Figure 1 is based. Our estimates are seasonally adjusted using the X-13ARIMA-SEATS seasonal adjustment method.

Figure 1 Underemployment

Unemployment has been taken as the traditional measure of excess capacity. Figure 1 shows that there was little difference between Scottish unemployment and underemployment rates until 2007. This was because the number of extra hours that some existing workers wished to work was almost exactly offset by the reduction in hours desired by a different group of workers. The same was true of the UK as a whole. However, since the beginning of Great Recession, more Scottish workers have expressed a wish to increase their hours, and fewer have argued for a cut in hours.  As a result, the underemployment rate has risen significantly above the unemployment rate. During 2012, the underemployment rate exceeded the unemployment rate by 1.9 per cent. Put another way, during 2012, on average, Scottish workers wanted to work a net 160 thousand extra hours per week. Their employers were unable or unwilling to hire them for these extra hours. This is equivalent to 51 thousand extra unemployed workers at the existing average Scottish workweek of 31.2 hours.  The unemployment rate on its own fails to account for this additional slack.

In Scotland and the UK as a whole, there has been a sharp upturn in underemployment since 2008. The more recent trend (from 2011Q4 to 2013Q1) shows Scotland performing relatively better in terms of underemployment compared with the UK as a whole (albeit starting from a slightly higher level at the end of 2011).  This is consistent with other labour market indicators, for example, from the Bank of Scotland. Nevertheless, over the last twelve years, there has been little significant change in the relative performance of the Scottish and UK labour markets in relation to their levels of excess capacity.

Table 1: Unemployment and Underemployment Rates in Scotland and the UK

UK Scotland
Unemployment Underemployment  Unemployment Underemployment
2001 Q2 5.1 4.8 6.4 6.9
Q3 5.1 4.8 6.6 7.1
Q4 5.2 4.9 6.7 7.0
2002 Q1 5.2 4.9 6.7 7.0
Q2 5.2 4.9 6.5 6.7
Q3 5.4 5.1 6.4 6.5
Q4 5.2 4.8 6.1 6.2
2003 Q1 5.2 4.9 6.0 5.9
Q2 5.0 4.7 5.4 5.6
Q3 5.1 4.6 5.9 6.2
Q4 4.9 4.5 5.8 5.9
2004 Q1 4.9 4.5 5.8 5.8
Q2 4.9 4.4 6.1 5.8
Q3 4.8 4.3 5.3 5.0
Q4 4.8 4.5 5.7 5.7
2005 Q1 4.8 4.4 5.6 5.5
Q2 4.8 4.8 5.6 5.9
Q3 4.8 4.6 5.5 5.3
Q4 5.2 5.1 5.2 4.9
2006 Q1 5.3 5.3 5.4 5.4
Q2 5.6 5.7 5.7 5.6
Q3 5.6 5.6 5.1 5.4
Q4 5.6 5.8 5.2 5.6
2007 Q1 5.6 5.8 5.0 5.0
Q2 5.4 5.5 4.7 4.4
Q3 5.4 5.5 5.0 4.7
Q4 5.3 5.3 4.9 4.7
2008 Q1 5.3 5.5 4.7 4.7
Q2 5.4 5.7 4.3 4.2
Q3 6.0 6.5 4.8 4.9
Q4 6.5 7.2 5.3 5.9
2009 Q1 7.2 8.2 6.0 7.1
Q2 7.9 9.3 7.1 8.8
Q3 8.0 9.3 7.2 8.7
Q4 7.9 9.1 7.7 8.8
2010 Q1 8.2 9.5 8.4 9.4
Q2 8.0 9.2 8.6 9.9
Q3 7.9 9.4 8.5 10.2
Q4 8.0 9.6 8.0 9.9
2011 Q1 7.9 9.2 7.8 9.8
Q2 8.1 9.7 7.9 9.8
Q3 8.4 10.1 8.0 9.8
Q4 8.5 10.3 8.7 10.7
2012 Q1 8.3 10.0 8.3 10.2
Q2 8.2 10.0 8.1 10.0
Q3 8.0 9.6 8.1 10.1
Q4 7.9 9.8 7.7 9.5
2013 Q1 8.0 9.8 7.3 9.0
Source: ONS Labour Force Survey Individual Data
Seasonal adjustment by the X-13ARIMA-SEATS method

About David Bell

David Bell FRSE is Professor of Economics at the University of Stirling. He graduated in economics and statistics at the University of Aberdeen and in econometrics at the London School of Economics. He has worked at the Universities of St Andrews, Strathclyde, Warwick and Glasgow. His research is mainly in labour economics, fiscal decentralization and the economics of long-term care. He has been budget adviser to the Scottish Parliament Finance Committee. He is PI for the Healthy AGing In Scotland project (HAGIS).
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