April 21, 2014 12:25 pm

British workers present economists with paradox

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IPC Office Workers Labour into the Night©Getty

Britain’s workers have a habit of confounding economists. This month they sauntered past a milestone they were not meant to reach for another two years when the unemployment rate fell below 7 per cent.

That means joblessness is low enough for the Bank of England to start thinking about raising interest rates from their record lows. It is in no rush though, in part because there are lots of people who have jobs but are not working as much as they would like. The BoE thinks all this “underemployment” means there is still plenty of slack in the labour market – meaning scope for the population to do more work without putting upward pressure on wages.

But the central bank’s focus on underemployment brings into view an overlooked paradox: Britons are both underemployed and working unusually hard.

The evidence for underemployment is clear: the proportion of part-time workers who say they want to work full-time has climbed from 10 per cent in 2007 to 18 per cent. And an analysis of Labour Force Survey microdata by economists David Bell and David Blanchflower shows that employed people say they would like to work more hours at the same rate of pay than they actually do.

Yet that is not because Britons are working less than usual. The total number of hours the population works has climbed well above its pre-crisis level. And average weekly hours per worker are the same as they were before the crash.

What is more, this comes after a long and steady reduction in the length of the average working week. According to the Office for Budget Responsibility, the official fiscal watchdog, average hours worked are above their long-term trend. And yet people say they want to extend their hours even more.

The OBR does not think this bout of industriousness will last. “Average hours worked have trended downwards for as long as the Office for National Statistics has recorded them and we expect this long-run decline to continue,” it wrote in its March Budget report.

Yet the BoE – which forecasts over a shorter time-horizon – thinks the status quo will persist for some time yet. As a result, it has revised up its estimate of the “medium-term equilibrium level” of average hours in the UK. The gap between this equilibrium level and the actual level accounts for about half of the slack the Monetary Policy Committee thinks is in the labour market.

Prof Blanchflower agrees that the underemployment numbers point to plenty of slack. “The hours people are working have gone up but they would like them to go up even more. They’re fighting to stand still,” he says.

Others are not so sure. Some economists think this desire to work longer may be a temporary phenomenon that could fade away on its own as the economy heals. Martin Weale, an external member of the MPC, explored this idea in a recent speech. He thinks there is less slack in the labour market than most of his colleagues on the committee.

“It may be the case that some of the net underemployment is a response to the state of the economy rather than any indication of genuine extra capacity,” he said. “For example, people whose partners lose their jobs may well say that they would like to work longer. But once their partners find new jobs, they may lose interest in doing so.”

Philip Rush, an economist at Nomura, agrees. “There are numerous reasons someone might say they want to work more hours, which are not necessarily effective at influencing inflation or ultimately resolved through actually working more hours,” he says.

“Following the large collective hit to real incomes that occurred in the Great Recession, it is rational to want to work more hours to reattain the previous standard of living. But when real incomes start to grow again . . . it may be just as rational to decide their standard of living can be best served by not sacrificing leisure time.”

Britons say they are hungry for more work. The future path of interest rates depends on whether they really mean it.

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