Labour market slack is the unmet demand for paid labour within a given population. The term describes the shortfall between the workers’ desired amount of work and the amount of paid work available.
Labour market slack exists when there are more workers willing to work a given number of hours than there are available jobs providing those hours of work. As a result, some workers remain involuntarily unemployed; alternatively, they work fewer hours than they wish.
The opposite of labour market slack is labour market ‘tightness’. A tight labour market is one in which demand for labour is at least as strong as supply – in other words, a labour market in which employers compete for workers. This generally results in a situation in which employee bargaining power in terms of wages and employment conditions is stronger. A slack labour market, on the other hand, tends to give employers an upper hand in the employer–employee relationship, potentially resulting in lower wages.
The most important indicator of labour market slack is the unemployment rate, which measures the share of the working-age population looking for work and available to work – but unable to find suitable employment. There are, however, additional forms of ‘hidden unemployment’ or ‘underemployment’ that contribute to a broader understanding of labour market slack. These terms relate to individuals formally categorised as ‘inactive’ or ‘employed’. Examples of individuals that fall into these additional categories are ‘involuntary part-time workers’ (those employed part time but who would prefer to work longer hours), so-called ‘discouraged workers’ (those who would like to work but have given up seeking work as they believe no suitable employment exists) and other inactive persons with some marginal attachment to the labour market, such as those seeking work but not immediately available for work.
According to Eurofound research, there were nearly 23 million unemployed people of working age in the EU28 in 2015, but approximately 50 million people in the broader category of labour slack. [1]
Eurostat has developed a framework based on the EU Labour Force Survey to describe the potential additional labour force based on these broader measures of labour under-utilisation. [2] In the United States, the Bureau of Labor Statistics reports six different labour market slack indicators (U1–U6), where U1 is the headline unemployment rate and U2–6 capture different combinations of the additional categories described above. [3] These indicators draw on the labour under-utilisation framework developed by the ILO, which underpins much of the methodological and conceptual work on underemployment carried out by the ILO since the 1960s. [4] These broader estimates of labour market slack have become more important for policymaking during the recovery from the 2007–2008 global financial crisis. By offering additional – often less positive – characterisations of the health of labour markets besides the headline unemployment rate, these estimates have served to support the introduction of more pliable measures of monetary policy, such as low interest rates.
Employment rate ; labour force participation ; labour market segmentation
Eurofound (2020), Labour market slack, European Industrial Relations Dictionary, Dublin
https://www.eurofound.europa.eu/en/european-industrial-relations-dictionary/labour-market-slack