There is almost zero wage growth in the US and the UK, even though there is full employment.

That is unexpected, because a tight labour market usually drives up wages. So what is going on?

New data in a research paper for the National Bureau of Economic Research suggests the wage-dampening effect of mass unemployment has been overtaken by the underemployment of the gig economy.

The paper's author told Business Insider that the US Fed and the Bank of England don't understand this, and are raising interest rates on false assumptions about what is really going on in the labour market.

One of the central mysteries about the economy right now is why there is so little growth in wages even though unemployment is low. Normally, when there is full or near-full employment, salaries and pay packets rise as employers find it harder to find and keep their workers. But that is not happening. Real wage growth after inflation is just -0.1% in the UK and 1% in the US.

This chart shows just how pitiful wage growth in the US is:

Bureau of Labour Statistics

The US and the UK both have very low unemployment, 4% and 3.9% respectively. They are record lows. Technically, we have full employment in both countries and much of Europe.

So what is going on?

Why isn't full employment making workers richer?

Economists David N.F. Bell and David "Danny" Blanchflower have found new evidence showing that the official statistic for "unemployment" is now a misleading indicator of what is actually happening to workers who are trying to find jobs.

In a research paper for the National Bureau of Economic Research circulated in August, they write that "unemployment" (where workers have no job whatsoever) has been largely replaced by "underemployment" (where workers have poorly paid part-time jobs and can't make enough money to meet their needs). Receiving unemployment benefits has been replaced by working 20 hours a week in an Amazon warehouse, in other words.

US increase in underemployment, pre-Great Financial Crisis to now:

April 2006: 3.1 million

Sept 2010: 9.25 million

July 2018: 4.56 million

Increase over the period: 1.46 million, up 47%

Wages are not rising, Blanchflower and Bell say, because whenever employers need new workers they can increase the hours of these part-timers rather than create new jobs.

Historic UK unemployment rates. UK Office for National Statistics

This sounds like a technical distinction but it has potentially huge consequences, Blanchflower tells Business Insider. Governments and politicians tout their records on reducing unemployment. The unemployment rate is a key measure of economic success. Central banks often "target" an unemployment rate as part of their dual mandate to control inflation and support jobs.

What if they're wrong?

In fact, central banks like the Bank of England and the US Fed are fundamentally misunderstanding what is happening to employment, and are making bad interest rate decisions based on these misleading signals, Blanchflower says. The low unemployment rate makes it look like the economy is at full employment. So central banks are raising rates in order to snuff out the inflationary effects that workers' wage demands usually have in such boom times. But because the role of unemployment has been largely replaced by the role of underemployment, we are not at "full employment" — and wage rises are not imminent.

UK increase in underemployment, pre-Great Financial Crisis to now:

April 2008: 696,000

April 2013: 1.46 million

April 2018: 991,000

Increase over the period: 295,000, up 42%

"Central banks think they are at full employment and they're raising rates and that's a mistake," Blanchflower says. "That's a major error of policymaking and thinking."

When central banks make mistakes — as they did prior to the 2000 and 2008 crises — it can trigger recessions.

Blanchflower's comments should be taken seriously. He is a former member of the Bank of England's Monetary Policy Committee (MPC), the panel that sets interest rates in the UK, in addition to being an economics professor at Dartmouth College. He told Business Insider that at least one current member of the MPC called him recently to discuss this research.

The data may contradict the Bank of England's official view

The BOE may be making a new mistake if Blanchflower's data is correct and the BOE's view is wrong. The pair have opposing views of what the data says: In the BOE's most recent inflation report, dated September 13, the Bank said it believed there was "a very limited degree of slack remaining" in the labour market. ("Slack" is the official term that describes jobless people who might yet be drawn into the workforce.) Blanchflower's study says the opposite: There is plenty of slack, and it is all in the form of part-time workers who aren't earning enough.

"Even though the unemployment rate has returned to its pre-recession levels in many advanced countries, underemployment in most has not," his study says. "Underemployment replaces unemployment as the main influence on wages in the years since the Great Recession."

Blanchflower and the Bank of England cannot both be right

One of them is wrong.

Previously, I have argued that the way the government, the media and economists focus on the headline unemployment rate but ignore the underemployment rate constitutes a "lie" because "unemployment" significantly underplays the actual lack of work available for workers who want it — and because the powers that be all know it but rarely talk about it.

Blanchflower disputed my use of the word "lie," calling it "ridiculous."

Fair enough.

"They're trying to create unemployment"

But in a conversation with me last week he sounded alarmed at just how severe the misunderstanding among policymakers is on the effect underemployment has on wages. It is not simply that low "unemployment" makes the economy look good when it's actually disguising historically high "underemployment."

It is worse than that: When the Fed and the BOE raise interest rates, they are essentially trying to generate extra unemployment in order to stave off future wage increases.

"They're raising rates because they think wages are set to explode [in the UK and US] ... in both cases they're trying to create unemployment," Blanchflower says.

So in theory, it's not just that wage growth is nonexistent. It's that the central banks of the UK and US may be about to make the situation worse if they're reading Blanchflower's data wrong.