Underemployment Full-Employment Test
Test labor strength through hours, bargaining power, wages, and job quality
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 98%
The Underemployment Full-Employment Test replaces a single unemployment-rate threshold with a broader assessment of labor slack. It examines how many people work fewer hours than they want, whether employment participation has recovered, whether workers can reject insecure jobs, and whether wages are rising without being pushed by minimum-wage laws or public-sector decisions. The mechanism is bargaining power: when labor is genuinely scarce, workers can obtain more hours, leave fragile contracts, demand better pay, and wait for good offers. If zero-hours arrangements, involuntary part-time work, weak wages, and low employment rates persist, hidden slack remains even when unemployment looks low. This broader diagnosis can prevent policymakers from raising interest rates prematurely and suppressing a recovery that has not yet reached ordinary workers.
Origin
Extracted from Masters in Business, where Danny Blanchflower argued that post-2008 underemployment made conventional full-employment measures misleading.
Core principles
- 01The headline unemployment rate omits important labor slack
- 02Workers gain bargaining power near genuine full employment
- 03Involuntary part-time work suppresses wage pressure
- 04Good job offers are a stronger test than job counts
- 05Weak wage growth can reveal hidden underemployment
How to run it
- 1
Ignore the Headline Temporarily
Set aside the headline unemployment rate and begin with the employment rate, participation, and their pre-crisis baselines. Determine whether the share of people actually working has recovered.
Pro tip Compare several years rather than choosing a single convenient baseline.
Watch out A low unemployment rate can coexist with people leaving the labor force.
- 2
Measure Desired Hours
Count involuntary part-time workers and survey whether employed people want more hours. Include workers who have some work but cannot obtain a full schedule.
Pro tip Distinguish people choosing part-time work from those constrained by employers.
Watch out Standard US measures may miss part-time workers who want additional part-time hours.
- 3
Inspect Job Security
Review scheduling predictability, temporary work, freelancing, self-employment income, and zero-hours contracts. Determine whether workers accept these arrangements voluntarily or because no better offers exist.
Pro tip Ask whether workers could reject the arrangement without prolonged unemployment.
Watch out Classifying fragile work as entrepreneurship can conceal labor-market weakness.
- 4
Test Bargaining Power
Assess whether workers can move to better jobs, negotiate flexibility, or demand higher wages. Persistent fear of replacement indicates that labor remains abundant relative to good jobs.
Pro tip Interview unions, recruiters, and frontline workers rather than relying only on employer surveys.
Watch out Employer reports of hiring difficulty do not necessarily prove broad worker power.
- 5
Decompose Wage Growth
Separate market-driven wage pressure from minimum-wage increases, public-sector pay changes, and compositional effects. Look for broad acceleration across occupations and regions.
Pro tip Use median and distributional measures rather than averages alone.
Watch out A temporary policy-driven wage increase can be mistaken for genuine full employment.
- 6
Make the Policy Call
Declare full employment only when hidden slack is low, insecure contracts recede, and workers receive good offers with broad wage gains. Otherwise preserve room for continued expansion.
Pro tip Treat the full-employment unemployment rate as an empirical outcome rather than a fixed historical constant.
Watch out Premature rate increases can slow the economy before labor-market recovery is complete.
In the wild
Roughly a million UK workers were described as relying on contracts that provided no guaranteed weekly hours and could prevent them from taking other work. Their inability to reject unpredictable schedules indicated weak bargaining power even while officials claimed the economy was near full employment.
→ Contract quality and desired hours exposed labor slack that the unemployment rate did not show.
An analyst sees wages rise while unemployment falls, but discovers that much of the increase came from new minimum-wage laws and a public-sector pay adjustment. Involuntary part-time work remains elevated and workers still report unpredictable schedules.
→ The analyst avoids interpreting policy-driven wage gains as proof of full employment.
Common mistakes
Equating Low Unemployment with Full Employment
The unemployment rate excludes important forms of slack, including insufficient hours and reduced participation.
Counting Every Gig as a Good Job
Self-employment or gig work may reflect layoffs, declining earnings, and an inability to obtain stable hours.
Misreading Mandated Wage Gains
Minimum-wage laws and public-sector adjustments can raise measured wages without indicating stronger bargaining power across the labor market.
Is it for you?
Best for
It is best for central bankers, labor analysts, employers, and investors evaluating labor-market slack and wage pressure.
Not ideal for
It is not ideal where reliable data on desired hours, employment participation, wages, and contract quality are unavailable.
From the transcript
“Forget the unemployment rate.”
“The definition of fulling I always like from Beverage, he says a full employment work as a standing by waiting for and I mean good…”
“Turns out the Phillips has to be written in underemployment under employments the story post two thousand and eight.”
From the episode
Danny Blanchflower Discusses Labor Economics (Podcast)
Danny Blanchflower