What is the true extent of Labour Market slack?
The TUC recently published a report showing that there were in fact 6.3 million unemployed compared with the 2.7 million on the international standardised measure used by the International Labour Office (ILO). This is 2.3 times higher than the standard ILO measure.
The TUC measure is not however a measure of unemployment. It is based on a definition adopted by the US Bureau of Labor Statistics (BLS) called “U6” which provides a measure of labour market slack. This includes those unemployed by ILO definitions, but adds some people who are classified as economically inactive by ILO definitions (not in work or ILO unemployed) who say they want a job and people who are working part time but who say they would like to work full time.
The TUC has produced a fascinating chart that shows how the two measures have moved over time, starting in April 1993, the first quarter such estimates can be provided from UK data. This suggests a strong structural element in the wider measure – in other words, high levels of labour market slack have been a semi-permanent feature of the UK labour market over the past 20 years and are not just a creation of the recession. Recent trends show ILO unemployment increasing much faster than the wider U6 measure.
The TUC analysis has had to use UK data, not all of which quite corresponds with US data and concepts. The biggest difference is that the US measures only includes the inactive who want to work if they have looked for work in the past year and could start a job in the week of the survey. The TUC uses the only readily available figure available, the total number of inactive who say they want a job. However, a closer match with the American “U6” definition would significantly reduce this total and therefore the overall estimate of labour market slack in the UK.
When discussing these issues some commentators also refer to the number of involuntary temporary workers – people in temporary work who said they would like a permanent job. While these people’s labour market position is by no means as secure as those in a permanent full-time jobs they are not included in the US U6 definition or in the TUC total, as they are not strictly speaking an indicator of labour market slack – people are working at the time of the survey even if they would prefer a more secure job.
More plausibly taken into account are the large number of part time workers who said they would like a full time job. The US measure includes all such part time workers, and so does the TUC. However, a stricter measure of labour market slack would try and measure the difference in hours that people are actually working against the hours they would prefer. Average hours actually worked by part time workers in the UK in their main job are about 40 per cent of average actual hours worked by full time workers.
These measures of labour market slack are useful not just to highlight the jobs challenge facing any government, but also to give analysts and policy makers a better idea of just how much labour is readily available to sustain a recovery. In recent years both the Office of Budget Responsibility and the Bank of England have looked at wider labour market slack measures for exactly this reason. The TUC measure is not a perfect match for the U6 indicator, but it can be refined and developed. Even more useful would be the adoption of a similar measure by the Office for National Statistics based on the U6 definition used by the US Bureau of Labor Statistics and published alongside the ILO unemployment measure.