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February 21, 2017
Unemployment versus Underemployment: Assessing Labor Market Slack
The U-3 unemployment rate has returned to prerecession levels and is close to estimates of its longer-run sustainable level. Yet other indicators of slack, such as the U-6 statistic, which includes people working part-time but wanting to work full-time (often referred to as part-time for economic reasons, or PTER), has not declined as quickly or by as much as the U-3 unemployment rate.
If unemployment and PTER reflect the same business-cycle effects, then they should move pretty much in lockstep. But as the following chart shows, such uniformity hasn't generally been the case. In the most recent recovery, unemployment started declining in 2010, but PTER started to move substantially lower beginning only in 2013. The upshot is that for each unemployed worker, there are now many more involuntary part-time workers than in the past.
Regarding the above chart, I should note that I adjusted the pre-1994 data to be consistent with the 1994 redesign of the Current Population Survey from the U.S. Bureau of Labor Statistics (see, for example, research from Rob Valletta and Leila Bengali and Anne Polivka and Stephen Miller ). This adjustment amounts to reducing the pre-1994 number of PTER workers by about 20 percent.
The elevated level of PTER workers has been most pronounced for workers in low-skill occupations. As shown in the next chart, PTER workers in low-skill jobs now outnumber unemployed workers who left low-skill jobs. Prior to the most recent recession, low-skill unemployment was always higher than low-skill PTER.
The increase in PTER workers is also mostly in the retail trade industry, as well as the leisure and hospitality industry, where low-skill occupations are concentrated. The PTER-to-unemployment ratio for the goods-producing sector (manufacturing, construction, and mining) has remained essentially unchanged. In those industries, unemployment and PTER move together.
Some researchers, such as our colleagues at the San Francisco Fed Rob Valletta and Catherine van der List, have argued that the increase in the prevalence of involuntary part-time work relative to unemployment suggests the importance of factors other than overall demand for labor. Among these factors are shifting demographics (a greater number of older workers who are less willing to do part-time work) and industry mix (more employment in industries with higher concentrations of part-time jobs). Such factors are almost certainly playing a role.
Recent analysis by Jon Willis at the Kansas City Fed suggests that the elevated levels of PTER in low-skill occupations may reflect that during the last recession, firms reduced the hours of workers in low-skill jobs more than they cut the number of low-skill jobs. In other words, firms still had some work that needed to get done, probably with peak demand at certain times of the day, and those tasks couldn't readily be outsourced or automated.
As the following chart from Willis's research shows, between 2007 and 2010, low-skill (non-PTER) employment actually increased slightly overall, but the mix of employment shifted dramatically toward part-time.
Since the recession, the pace of (non-PTER) low-skill job creation has been modest (about 20,000 jobs per month compared with 60,000 jobs per month in the years preceding the recession). Initially, this trend helped reduce low-skill unemployment more than the incidence of PTER—one reason why the ratio of PTER to unemployment continued to increase.
But the number of PTER workers in low-skill jobs has since been declining as more people have been able to find full-time jobs. At the current pace of job creation and (net) transition rates out of PTER, Willis estimates it would take until 2020 to return to prerecession levels of low-skill PTER. That seems a reasonable guess to me.
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