Underemployment and the Employment Gap Andrew Levin IMF and Dartmouth College September 2014 The views expressed are solely my own responsibility and should not be interpreted as reflecting the views of the IMF or of any other individual or institution.
Some Crucial Questions Definition: Underemployment refers to the incidence of part-time workers who are unable to work full-time because they can t find a full-time job or because their employers have slack business conditions. To what extent do cyclical vs. structural factors account for the post-2007 surge in underemployment? Does the persistence of an elevated level of underemployment appear to reflect insufficient aggregate demand or hysteresis? What is the magnitude of underemployment compared with the unemployment gap and the participation gap; i.e., how much does the incidence of underemployment (gauged in terms of FTE jobs) contribute to the overall size of the employment gap?
Underemployment in Five OECD Economies (PT workers seeking FT jobs, as percent of employment) 2007 2009 2011 2013 Canada 4.0 5.3 4.1 5.2 Italy 4.4 5.4 6.8 9.1 Spain 3.6 5.6 7.5 9.8 United Kingdom 1.9 2.8 4.0 4.1 United States 0.9 1.6 2.0 2.0
Distinguishing Labor Market Functioning vs. Aggregate Demand Shortfalls Labor market functioning was persistently impaired in the wake of the Great Recession; cf. new jobless claims, quit rates, etc. As macroeconomic uncertainty has diminished in the past few years, those labor market indicators have reverted toward historical norms. Nonetheless, normal labor market functioning does not imply that aggregate demand has been restored to its equilibrium level. Analogy from financial markets: bid-ask spreads vs. risk premiums Thus, an index or weighted average of a wide array of labor market indicators may not be useful for gauging the degree of resource slack.
8 7 6 The Composition of U.S. Underemployment (as percent of total employment) Seasonal Demand Employer Slack (usually work FT) Employer Slack (usually work PT) Can't Find Full-Time Job Percent 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 2012 2014
The Evolution of Underemployment Since 1970 8 7 Underemployment Trend with Breaks Percent 6 5 4 3 2 1 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
State-Level Data on Underemployment 8 Percent Change in Underemployment, 2007-2010 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Change in Unemployment, 2007-2010
Assessing the Underemployment Gap Percent 8 7 Underemployment Rate Pre-Crisis Trend Projected Trend 95% Confidence Band 6 5 4 3 2 2004 2006 2008 2010 2012 2014
Potential Concerns about Hysteresis Is the incidence of underemployment relatively widespread or confined to specific demographic groups, industries, and occupational categories? Are there substantial flows into/out of underemployment, or does it appear that those individuals who are currently underemployed are stuck in that status and may no longer be employable in full-time jobs? Does the prevalence of underemployment have any influence on wage-setting patterns for the broader labor market? Analogy: cf. parallel questions regarding labor force participation
12 11 10 9 8 7 6 5 4 3 Females Males Youth Underemployment (Ages 16-24) Percent 2 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
7 6 5 Underemployment for Prime Age & Older Males 25 to 34 Years 35 to 44 Years 45 to 54 Years 55 Years & Above Percent 4 3 2 1 0 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
7 6 5 Underemployment for Prime Age & Older Females 25 to 34 Years 35 to 44 Years 45 to 54 Years 55 Years & Above Percent 4 3 2 1 0 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Underemployment by Sector (percent change from 2007 ) 2009 2011 2013 Manufacturing 179 61 31 Construction 86 42 10 Transp. & Util. 99 68 68 Financial Svcs. 79 66 62 Wholesale & Retail Trade 109 128 113 Hosp. & Leisure 106 113 111 Health & Educ. 94 112 111
Underemployment by Occupation (percent change from 2007 ) 2009 2011 2013 Production 148 73 32 Maintenance & Repair 140 95 58 Services 102 110 109 Management 103 98 94 Sales 101 113 101
Flows into/out of Underemployment Source: Cajner et al., Why is Involuntary part-time Work Elevated? FEDS Notes, April 14, 2014. (Available at federalreserve.gov)
Gauging the Employment Gap The magnitude of the overall employment gap that is, the deviation of actual employment from its maximum sustainable level can be expressed as the sum of three specific components: (1) unemployment gap: the deviation between actual unemployment and its longer-run normal rate (2) participation gap: the deviation between the actual labor force and the level that would solely reflect demographic and structural factors (3) underemployment gap: the extent of involuntary part-time work (measured in FTEs) relative to its longer-run normal incidence
8 7 6 The Magnitude and Composition of the Total Employment Gap (gauged in terms of full-time equivalent jobs) Percent Unemployment Gap Participation Gap Underemployment Gap 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014
The FOMC s Monetary Policy Framework The FOMC seeks to explain its monetary policy decisions to the public as clearly as possible...the Committee s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision...in setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee s assessments of its maximum level. FOMC Statement of Longer-Run Goals and Policy Strategy