Once again on the reserve army of the unemployed and underemployed

Mainstream economists have, it seems, rediscovered what we’ve known since at least the middle of the nineteenth century: capitalism produces a relative surplus population of unemployed and unemployed workers. And that surplus of labor puts downward pressure on workers’ wages.

Back then it was called the “industrial reserve army.” I have referred to it since 2010 as the “reserve army of the underemployed.” David G. Blanchflower and Andrew T. Levin now point to the same phenomenon in terms of the “employment gap,” that is, the combination of conventional unemployment (individuals who did have a job, are now not working at all, and are actively searching for a job), underemployment (that is, people working part time who want a full-time job), and hidden unemployment (people who are not actively searching but who would rejoin the workforce if the job market were stronger).

What Blanchflower and Levin find is instructive.

First, the conventional unemployment rate has not served as an accurate reflection of the evolution of labor market slack.

it is evident that the U.S. economic recovery remains far from complete in spite of apparently reassuring recent signals from the conventional unemployment rate. Indeed, while the unemployment gap has become quite small, the incidence of underemployment remains elevated and the size of the labor force remains well below CBO’s assessment of its potential. In particular, the employment gap currently stands at 1.9 percent, suggesting that the “true” unemployment rate (including underemployment and hidden unemployment) should be viewed as around 71⁄2 percent. Gauged in human terms, the current magnitude of the employment shortfall is equivalent to about 3.3 million full-time jobs.

Second, in recent years, wage growth has been pushed down by a combination of the unemployment rate, the nonparticipation rate, and the underemployment rate. In particular,

we suspect that the wage curve is relatively flat at elevated levels of labor market slack, i.e., a decline in slack does not generate any significant wage pressures as long as the level of slack remains large. As noted above, our benchmark analysis indicates that the true unemployment rate is currently around 71⁄2 percent—a notable decline from its peak of more than 10 percent but still well above its longer-run normal level of around 5 percent. Thus, the shape of the wage curve can explain why nominal wage growth has remained stagnant at around 2 percent over the past few years even as the employment gap has diminished substantially. Moreover, our interpretation suggests that nominal wages will not begin to accelerate until labor market slack diminishes substantially further and and the true unemployment rate approaches its longer-run normal level of around 5 percent.

In other words, what Blanchflower and Levin have discovered is that there is a large relative surplus population of workers and that the existence of such a reserve army has a dampening effect on workers’ wages.

Now, all they need to do is discover a third component of what we’ve known since the Mohr wrote back in 1867: “The labouring population therefore produces, along with the accumulation of capital produced by it, the means by which it itself is made relatively superfluous, is turned into a relative surplus population; and it does this to an always increasing extent. This is a law of population peculiar to the capitalist mode of production”