Disguised Unemployment

Updated on January 25, 2024
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Disguised Unemployment?

Disguised unemployment refers to a situation wherein laborers employed in a task cannot utilize their full potential, and their overall productivity remains low. Analysts try to identify this unemployment loophole in the economy to identify poor allocation of resources and reallocate them efficiently to increase total output.

Disguised Unemployment

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Disguised unemployment, also known as hidden unemployment, highlights low marginal productivity or inefficiencies in the labor force. It occurs when workers are a part of the labor force but function beneath their actual potential. A high level of hidden unemployment is a grave concern for an economy as it can hurdle the realization of higher GDP or total output.

Key Takeaways

  • Disguised unemployment is when a part of the labor force is working below their potential, or too much labor is doing too few jobs. This scenario results in very low or zero marginal productivity. 
  • Such an unemployment crisis leads to poor labor force productivity in an economy. As a result, it keeps the total output or GDP very low even when the employment rate is high or stable. 
  • It is difficult to track hidden unemployment as many nations record only unemployment levels and not labor productivity. Thus, it also affects adequate policy formulation to reduce hidden unemployment.

Disguised Unemployment Explained

Disguised unemployment meaning usually implies developing countries with large populations where the labor supply is in excess but has fewer job opportunities. As a result, the labor force, which includes people working or actively seeking job opportunities, has very low total productivity. 

There are many causes of disguised unemployment, but these underlie a few broad ones. Firstly, skilled laborers do unskilled work requiring low or no skill set. Thus, they cannot utilize their potential skill set at work. 

Secondly, low productivity is also because too many laborers are employed to complete a task that requires only a few workers. As a result, some workers’ potential remains idle or irrelevant in the total output. Consequently, their work does not change the total output. For instance, disguised unemployment in agriculture, especially in developing countries, reflects marginal productivity to be zero.

Thirdly, causes of disguised unemployment include the inability of the policymakers to maintain data on the poor or low productivity of laborers. It is because, in an economy, hidden unemployment can be present in any segment of workers. It is because they might have lower productivity or are doing jobs wherein they are not using their full potential. Thus, it is mostly unnoticed or not counted in the unemployment statistics of an economy. 

An example of disguised unemployment is the informal sector, where abundant skilled and unskilled laborers are available. Such labor markets include construction, domestic, agricultural workers, or platform and gig workers. However, their true potential remains unrecorded in the unemployment data. 

Especially in developing countries, governments cannot maintain such an intrinsic data set on hidden unemployment. The labor market is huge in developing economies, and the governments lack adequate resources to maintain this data. As a result, this problem remains outside adequate policy formulation and implementation, especially in rural areas.

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Disguised unemployment refers to underemployment or partial unemployment. Let us look at a few examples to understand disguised unemployment’s practical implications.

Example #1

For instance, a person with a walking disability has restricted mobility and may not be able to utilize their full potential. It means that they might look for a place to work which is more friendly and welcoming in terms of facilities and infrastructure for the disabled. These criteria might limit working opportunities for a person, and they might look for more suitable options. 

Data collected on persons with a disability in the Current Population Survey (CPS) released by the U.S. Bureau of Labor Statistics found that persons having any disability are more likely to be self-employed than those who are not disabled. The same report also highlighted that in 2021 in the United States, 29% of workers with a disability were employed in a part-time job, while part-time workers with no disability made up 16% of the labor force. 

Example #2

The concept of disguised unemployment explains various causes of why an economy faces such unemployment. Two such causes are the low capital-to-labor ratio and the poor availability of skilled labor. These are some crucial reasons for high disguised unemployment levels in developing countries of Africa.

In the case of South Africa, the education system does not provide adequate skill sets or industrial training. Thus, the true potential of the labor force remains unrealized, or they cannot gain access to the formal jobs market. As a result, there are poor levels of industrialization in the continent.

Disguised Unemployment vs Seasonal Unemployment

Disguised unemployment refers to excessive labor employment in a particular activity that requires only a few workers. Thus, the overall labor productivity is very low as too many workers are doing the same job, or too few jobs are available. On the other hand, seasonal unemployment arises when work or jobs are scarce during a period or year. For instance, during certain cropping seasons, labor demand is high in agro-based industries, including food processing and manufacturing.

An example of seasonal unemployment can be winter adventure activities like skiing or snow sledding, attracting many tourists during the peak seasons. Thus, the people working as trainers and tourist guides will be doing part-time jobs for 3-4 months, generating more revenue with higher productivity. 

 A major difference between disguised unemployment and seasonal unemployment is that of labor productivity and labor demand. While in a situation of disguised or hidden unemployment, laborers might be redundant or inefficient in their productivity. This inefficiency makes the marginal productivity zero and brings no change in the total output. However, during seasonal unemployment, there is a lack of demand for laborers due to seasonal industries being out of work.

Thus, in the case of seasonal unemployment, workers are aware of the period they will be unemployed and contribute by increasing the overall output when the demand is high. On the contrary, even an abundance of labor cannot produce additional output in the case of disguised unemployment.

Frequently Asked Questions (FAQs)

1. What happens in disguised unemployment?

Disguised unemployment arises when a part of the labor force works in roles that are beneath their potential, resulting in low marginal productivity. As a result, they do not bring any change in the total output despite their efforts. It is because the labor supply remains excessive and insufficient capital or training deprives the labor force of improving their productivity.

2. Where will you find the disguised unemployment most?

Hidden unemployment can occur in any segment of the economy where labor has lower productivity due to a job beneath their potential. However, such scenarios occur mostly in developing countries where the labor force has low skill sets and few job and training opportunities. Thus, too many people are doing too few jobs. 

3. How to reduce disguised unemployment?

Such hidden unemployment is a grave concern, especially in developing countries, as they have huge populations, low literacy rates, and a lack of resources in terms of capital, infrastructure, or training facilities. Thus, an economy should improve upon these factors to reduce high levels of hidden unemployment.  

This article is a guide to What is Disguised Unemployment. Here we explain it with examples and compare it with seasonal unemployment. You can also go through our recommended articles on corporate finance-

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