Key insight: Has underemployment been placing downward pressure on wages?

As unemployment rates plummet, economists have become increasingly perplexed by the lack of wage growth in most developed economies. Low unemployment is usually associated with an upward pressure on wages, as there are fewer people without jobs competing for work. The breakdown in this relationship has encouraged economists to examine underlying labour market trends (Figure 6). The answer may, however, be hiding in plain sight; unemployment may be a poor proxy for labour market slack, i.e. the number of additional workers which could be employed without prompting inflationary wage pressure.

It is useful to define unemployment: the unemployed are those who are without work, who are available to work and are actively seeking work. Individuals working less than they would like are classified as underemployed, whilst those who are not actively seeking work are out of the labour force.

Evidence suggests that some of those not participating in the labour force continue to seek work. This figure falls during recessions and is found to rise during recovery periods.24. This implies that during recoveries, the amount of labour market slack is greater than suggested by the unemployment rate, placing downward pressure on wages.

Underemployment occurs when an employee wants to work more hours than they currently do at the prevailing wage rate. This could plausibly place downward pressure on wages, as hours can be increased at the current wage, rather than at the higher wage which would prevail if hiring externally. Recent research has found considerable evidence that, since the 2008 recession, underemployment has become a better predictor of real wage growth than unemployment and that it is associated with lower wage growth.25. Underemployment has also been shown to have increased almost universally across Europe since the Financial Crisis, whilst unemployment has fallen.

Key insight: How does occupational gender segregation affect jobs and wages?

The idea of specifically male or female jobs conjures up outdated ideas, in which almost all women worked in administrative or caring positions whilst men did the physically and intellectually demanding work. Although things certainly have changed since the mid-20th century, the occupational structure in many countries remains highly gendered. Figures from the International Labour Organisation (ILO) indicate that the vast majority of managers, craftsmen and operators are men, whilst women tend to dominate clerical roles (Figure 10).

This may seem reasonably benign, but in these female-dominated occupations, wages are lower, even when educational differences are accounted for.27. The forces of automation and globalisation also interact with occupational segregation leading to effects which can impact one gender disproportionately.

A recent report by the International Monetary Fund (IMF) finds that women tend to work in occupations which contain a greater proportion of routine tasks and fewer abstract tasks than men.29. It is now widely accepted that the automation of many routine tasks is technologically possible, implying that women are more vulnerable to automation – 11% of women are at high risk relative to 9% of men. Women’s predominance in routine occupations is also found to explain almost 5% of the gender wage gap. However, their tendency to work in the health and education sectors, which require greater use of personal and social skills, mitigates some of this automation risk in the long run.30.

Designing and programming artificial intelligence occupations are particularly segregated with women making up a mere 22% of workers.31. The lack of diversity in a job that is pivotal to the creation of new and potentially ubiquitous technologies is a cause for concern.

The unconscious bias of programmers and the use of data which is unrepresentative of the underlying population could reinforce current inequalities and possibly exacerbate them in the future. For example, an algorithm may interpret the lack of senior women in the corporate world as a reflection of lower levels of ability amongst women. This could result in women not being selected for interviews for senior positions.

Occupational segregation can also lead to gendered globalisation impacts. In advanced economies, certain sectors and occupations have been particularly susceptible to external cost competition, with tradeable sectors such as manufacturing most exposed. Whilst both genders are vulnerable, shocks affecting male-dominated occupations have been associated not only with job losses and wage contractions, but also changes in social norms.32. For instance, in the US, a policy change which enabled greater Chinese imports of cheaper goods disproportionately affected males and was associated with a decline in marriage rates, a decline in fertility and an increase in the number of children living below the poverty line.33.

In developing countries, occupational segregation may also limit women’s ability to take advantage of the benefits of globalisation.34. For example, women may be impeded from taking up roles made available by globalisation in tradeable sectors such as manufacturing. Whilst some evidence suggests that globalisation brings more employment opportunities for women in the formal sector, these positions have tended to be in lower-skilled positions. Structural constraints, such as lower levels of education, may also prevent women from filling high-value positions, made available by globalisation. Globalisation thereby has the potential to both exacerbate and mitigate current segregation and reinforce existing gender inequalities.


Key insight: Where have all the jobs gone? The decline of mid-skill employment 

Across the developed world, there has been a reallocation of employment from mid-skill to high- and low-skill jobs. This is ultimately a function of technological change which has reduced the demand for mid-skill, typically non-higher-educated workers. Figure 11 demonstrates this phenomenon: between 2000 and 2017, industrialised countries tended to shed mid-skill jobs whilst adding high- and low-skill positions.

Rapid technological development has enabled machines and software to complete many routine and increasingly non-routine tasks. As the cost of these machines and programmes falls, they become increasingly close – and sometimes superior – substitutes for the humans who previously completed the tasks, leading to employment losses in vulnerable occupations. These include bookkeepers, paralegals and ICT support, as well as other traditional mid-skill jobs.

Technological advances have also dramatically lowered the cost of international communication, enabling discrete components of a production process to be offshored to the most cost-competitive location. In theory, virtually any task could be offshored provided it does not have to be completed in person.35. Mid- and low-skill positions such as customer service roles have, however, tended to be more susceptible to offshoring than high-skill roles, in which developed countries continue to have a comparative advantage, despite high costs.

This hollowing out of the middle has created a two-tier economy of high-skill, high-wage jobs and low-skill, low-wage jobs. Mid-skill workers have tended to be pushed into lower-skilled areas creating an excess supply of less-educated labour thereby depressing wages.36. Conversely, for high-skill workers, demand has continued to outstrip supply, meaning the higher education wage premium continues to grow.

Recent research analysing newly introduced occupation titles indicates that this hollowing out of mid-skill jobs is set to continue. Almost all new occupations can be classified into three well-defined categories; frontier, last-mile and wealth-related jobs.37. The first includes high-skill, high-wage and technically advanced occupations such as programmers, whilst the second includes low-skill, low-wage occupations which continue to require human input such as call centre workers. The third category, ‘wealth work’, requires limited technical skill and is typically low-wage. ‘Wealth work’ jobs typically involve the provision of a service to the more affluent, for example, a yoga instructor or nanny. The fact that the polarisation of job quality looks set to continue suggests that policies such as Universal Income and upskilling programmes may be required to mitigate its impacts.