Wage inflation has stopped rising. The ONS might say next week that annual earnings growth in the last three months actually dipped a little from the second quarter.
For those raised on orthodox economics, this seems strange. Other figures on Tuesday will show that unemployment, at under 4 per cent of the workforce, is close to its lowest level since 1974. In theory, such low unemployment should trigger rising wage growth. So why isn’t it?
One reason is that the headline unemployment rate is a bad measure of what really determines wages, which is the overall amount of potential excess supply of labour.
The ONS is also likely to report next week that there are over 3.2m people who would like to work more hours. Although this number is down from its recession peak, it is still far above the sub-2.4m low we saw in the mid-2000s. This measure thus tells us that there’s much more slack in the labour market than the headline unemployment rate suggests. And this is not to mention the large number of people who are underemployed in a different sense – of being over-qualified for the jobs they are doing.
One element of this underemployment is the number of part-timers who’d like a full-time job. There are 869,000 of these – far more than the sub-600,000 we saw in the mid-2000s. David Blanchflower and David Bell have shown that this measure significantly reduces wage growth – a finding that corroborates that of a team of IMF economists.
Common sense suggests this is the case. It’s easy to get an underemployed part-timer to work more as they already know the job. Hiring someone who’s unemployed, however, is costly as you have to interview them, and uncertain because you don’t know how good they’ll be. The unemployed, therefore, are poor substitutes for the fully-employed, whereas part-timers are great ones. And more substitutes mean more competition and hence lower prices.
Unemployment and underemployment, however, are not the only ways in which the labour market is failing to give people what they want. The ONS says there are also 3.3m people who would like to work shorter hours for less pay. This is also a sign of labour market slack. It means people can’t move to jobs that suit them better – which means there are not enough jobs.
All this suggests the Bank of England is wrong to think the economy is operating close to full capacity. It’s not.
Instead, we have another problem. Next week’s numbers might show that unemployment and underemployment have already bottomed out and are rising slightly. This matters. One of the strongest findings in social science is that joblessness makes people very unhappy. “Unemployment hurts and it hurts a lot,” says Professor Blanchflower in his recent book, Not Working. So too, he says, does underemployment. He shows that involuntary part-timers are less happy than other employees.
With labour market slack posing little threat of inflation but doing real psychological harm, there is, he believes, a good case for policy-makers to “put the pedal to the metal” – to run loose macroeconomic policy. In this sense, there is a justification for the spending increases that both main parties will promise during this election campaign.
