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Working Paper 14-2

Labor Market Slack in the United Kingdom

by David N. F. Bell, University of Stirling, Scotland
and David G. Blanchflower, Peterson Institute for International Economics

July 2014

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This paper examines the amount of slack in the UK labor market and finds the downward adjustments made by the Monetary Policy Committee (MPC) to both unemployment and underemployment invalid. Without evidence to support its assessment of the output gap, the MPC reduces the level of unemployment based on its claim that long-term unemployment does not affect wages. The authors produce evidence to the contrary and present arguments on why the MPC's halving of the level of underemployment in the United Kingdom is inappropriate. Bell and Blanchflower set out arguments on why they believe the level of slack is greater than the MPC calibrates. Consistent with that is the fact that real wages in the United Kingdom continue to fall.

Data disclosure: The data underlying this analysis are available here [xlsx]. Please direct inquiries on European Labor Force Survey data to Eurostat.


RELATED LINKS

Policy Brief 13-20: Role of Apprenticeships in Combating Youth Unemployment in Europe and the United States August 2013

Op-ed: Be Warned George Osborne: More Home Owners Just Really Means Higher Unemployment May 12, 2013