MPC risks mistakes

In new research by published in the latest National Institute Economic Review David Bell (University of Stirling) and David Blanchflower (Darthmouth) College said downward adjustments to estimates of long-term unemployment and underemployment were made by the MPC in order to reduce the estimated level of slack in the UK economy.

Their research claimed that these adjustments are inappropriate as the UK labour market is much further from full employment than the MPC calculates and therefore there is much less pressure on wages than it is forecasting.

Given the recent unexpectedly rapid fall in the unemployment rate, the extent of labour market slack in the UK economy is an important issue for policymakers.

MPC member Martin Weale outlined the committees approach to labour market slack in the May 2014 Inflation Report, under ‘Assessing the degree of spare capacity’.

Bell and Blanchflower contest the MPC’s view that the long-term employed, because of their supposed greater distance from work, should be treated as a different category when assessing the level of slack in the UK labour market.

The authors found no statistically significant difference between long-term unemployment and overall unemployment in their effect on wages.

They also claimed that there is insufficient evidence that recent estimates of underemployment tend to exaggerate the extent of labour market slack, seeing little or no reason to believe that the underemployment rate will not return to balance as the economy approaches full employment, with individuals becoming less constrained in their choices of how many hours to work.

Bell and Blanchflower also found several empirical issues with this analysis. These include sample selection biases which under-represent the amount of underemployed and overemployed, small sample sizes which create uncertainty over the adjustments, a fall in response rates, and the absence of the self-employed from the analysis.