Washington Times, May 7, 2008: The underemployed

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May 7, 2008

By Alfred Tella – The April employment data reported on May 2 struck a sour note, though it was less unpleasant than expected. Payroll jobs were little changed from a month earlier (20,000 less), and the unemployment rate also hardly budged (5.0 percent versus 5.1 percent in March). The stock market immediately rallied.

Commentators cheered the so-called “decline” in unemployment, taking it as an indicator of a mild downturn though, like the jobs data, it wasn’t a statistically significant change. The indicators that worsened hours of work, weekly earnings, long-term unemployment, and, not least, underemployment generally got smaller print.

Who are the underemployed? you may ask. There’s more than one meaning. Economists often apply the term to people working below their skill or education level. But that’s hard to measure and is little talked about.

More commonly the term refers to people who want full time employment, but, because of slack business conditions, have to work part time. (Part time is defined by Labor Department as working in a job fewer than 35 hours a week.) They can be thought of as partially unemployed, but because they’re working, they’re not included in the official unemployment count.

People work for income, for which employment is an incomplete and sometimes a poor proxy. That can be the case when there is noncontinuity or a threshold limit in economic statistics, such as poverty or employment.

For example, the official poverty rate can decline if the incomes of a group of households that are a dollar below the poverty line rise a dollar above the line at the same time that many more households just below the line fall deeply into poverty. Overall, the situation has become worse, but the poverty rate shows an improvement.

In like fashion, an unemployed person need only find work for one hour a week to be reclassified as employed. To assess any economic condition, it’s always wise to examine a variety of relevant data.

The rate of underemployment can be measured as the percent of involuntary part-time workers in the labor force. It can also be estimated in terms of working hours: actual hours worked by the underemployed as a percent of full-time hours.

Between March and April of this year the “head count” underemployment rate rose from 3.2 percent to 3.4 percent. This represents an increase from 4.9 million to 5.2 million in the number of people found in the government’s household survey to be involuntarily working part time either because their hours had been cut back or because they could not find a full-time job.

This is not small potatoes. In April, officially measured unemployment amounted to a little more than 7.6 million. Underemployment was nearly 70 percent as great.

In the post-2001 economic recovery, the number of underemployed hit a low of 3.9 million in April 2006, equal to 2.6 percent of the labor force, and has been on a rising trend ever since. In the last two years, the rate has risen by 0.8 percentage point compared to a 0.3 point rise in the official jobless rate.

Partial unemployment has been rising faster than total unemployment for some time. Involuntary part-time employment now is the highest it has been in 15 years.

In the initial stages of economic weakness, employers tend to reduce their employees’ hours of work rather than lay workers off until there’s clearer evidence of a downturn. This causes part-time employment to rise as more employees work fewer hours, even though total employment may temporarily not decline. Weekly earnings, though, do suffer.

The recent behavior of underemployment, however, differs from the pattern of the last half-century. In the past, increases in involuntary part-time employment usually have not led declines in overall jobs by more than a few months. But the lead time prior to this year’s decline in jobs has been nearly two years. The reason for so long a lead has yet to be explained. But the underemployment rate surely gave us ample warning of what was coming. Regrettably, too few of us were paying attention.

The underemployment rate is an important economic indicator. The Labor Department does not separately report the rate in its monthly press release on the employment situation. It should.

Alfred Tella is former Georgetown University research professor of economics.

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