Underemployment and the rise in low-quality jobs
New Zealand’s unexpectedly low unemployment rate for the June quarter took almost everyone by surprise. At 4 percent it was well below market and Treasury’s own expectations. But behind the headline unemployment figures was the biggest drop in hours worked since records began 30 years ago.
Globally the collapse in the available hours of work has been a defining feature of the pandemic. Underemployment tends to rise after a recession then gradually recedes. But after the global financial crisis of 2008, underemployment for most developed countries never trended back down to pre-recession levels.
Underemployment represents people who are working fewer hours a week than they want or need, or are in jobs that are below their qualifications. The impact of the coronavirus on underemployment is already being felt:
In the US, the number of involuntary part-time workers was 3.3 million higher in August from February this year.
In the UK, the underemployment rate from April to June was 8.6 percent up from 7.6 percent in the same period last year.
In Australia, the seasonally adjusted underemployment rate in July was at 11.2 percent, up from 8.5 percent in 2019.
In New Zealand, the underemployment numbers grew sharply from 90,000 in December to 125,000 in June and hours worked fell by a record 10.3 percent.
For the first time in New Zealand, there are now more underemployed people than unemployed, which suggests there is considerably more slack in the labour market than the unemployment rates suggest.
If the experience from the GFC is repeated, underemployment will continue to climb and may never return to pre-pandemic levels. This has big implications for New Zealand’s recovery. When people’s finances are stretched it reduces consumer demand and slows economic growth.
Most of the underemployed are part-time workers and New Zealand already had one of the highest rates of part-time workers in the OECD. By 1999, 20 percent of the available workforce were working part time. Of those people, Stats NZ estimates that one in five of those working part time were not doing so by choice.
Part-time Employment Rate in OECD Countries
Is the job market shrinking?
The job market was shrinking globally well before the arrival of coronavirus. According to a recent ILO report, not enough new jobs are being created to absorb the growing labour supply with almost a billion people worldwide working fewer hours than they would like. It’s predicted that the reduction in economic output caused by the coronavirus could see a loss of anywhere up to 340 million full-time jobs by the end of 2020.
Who is more likely to be affected?
Underemployment tends to affect those who are also most impacted by the current crisis: women, younger workers and those more likely to be on variable wages, such as hospitality, tourism and retail staff.
Decline in job quality
Low quality jobs (less hours worked for less income) tend to be a by-product of recessions, but job quality has been declining in much of the advanced world since the 1990s.
In addition to the growing numbers of part-time workers, temp, contract and freelance jobs are on the rise. Hays Recruitment suggests these latter short-term jobs now account for 30 percent of New Zealand’s workforce.
While there is no definitive answer as to why underemployment is growing, it seems to be driven by structural economic factors. These include technological advances, skills mismatch for the new jobs being created, and the decline in manufacturing jobs relative to lower-paid service industry roles.
Depressed wage growth
While the persistently low unemployment should be placing an upward pressure on wages, the opposite is occurring. In the search for explanations for the persistently low wage growth in developed countries since the GFC, there is evidence that underemployment has been responsible.
Underemployment effects on mental health
A recent study of underemployed workers in the UK found that involuntary part-time work takes a toll on the individual’s mental health due to:
- increased financial strain from a drop in income
- less contact with the workplace and the positive benefits “having a sense of being useful and needed by others, being active, and having a structured experience of time” and
- lower levels of self-esteem compared to their fully employed contemporaries.
College graduates who are unable to find jobs that match their qualifications are hit particularly hard according to a 2012 Gallup Poll.
So while wage subsidies have so far successfully prevented the unemployment rate from skyrocketing to the levels initially forecast, the levels of underemployment will ultimately give a better indication of the true health and wellbeing of the labour force. The focus now needs to be on creating high-quality, full-time jobs, and crucially, ensuring the workforce is armed with the right skills for the jobs of the future.