Underemployment

Underemployment Definition

Underemployment is a condition when workers under-utilize their time or skills as they are not able to get jobs that fully utilize their skills or are not able to get full-time jobs that utilize their skills forcing them to work part-time and multiple jobs to make ends meet, resulting in underutilization of human resources.

Explanation

Underemployment falls somewhere between full employment and unemployment, which essentially means that the workforce is not utilized to its full potential. There could be many reasons for this including economic downturns, business slowdowns or structural technological changes. Here, people are forced to take jobs which they are overqualified for or have to work part-time instead of working full-time.

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Types of Underemployment

There are mainly two types  –

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#1 – Visible

This is visible when workers are not able to secure a full-time job in their desired role and have to work part-time or work multiple part-time jobs to pay their bills. It is called visible because it can be easily observed and quantified.

#2 – Invisible

The invisible underemployment is hard to observe and measure because here the workers do have full-time jobs but those jobs do not utilize their primary skills in part or in full. This kind of unemployment may be prevalent when not enough job opportunities are available for the skilled or when job opportunities are available but they require different skill sets than what is available.

Formula

The number of underemployed is determined by the Bureau of Labor Statistics (BLS) and published in periodic reports based on the survey BLS undertakes to report other labour related statistics like unemployment, wage growth etc.

The underemployment rate is calculated by dividing the number of underemployed individuals by the number of individuals in the workforce. The calculation is similar to that of unemployment, with a different numerator.

Example of Underemployment

Consider a country’s economy is hit hard by an economic downturn. People are out of jobs, which are already scarce. A university graduate, who can easily get a white-collar job has to work at the departmental store to make ends meet. Herein, while the graduate can be working in a much higher paying job which would have suited his skill set, he has to work in a sub-optimal environment to make ends meet.

When many workers are living in similar situations, the condition can be termed as underemployment.

Causes

There could be a number of causes of underemployment related to the broader economy or microeconomic factors. Here we discuss some of them:

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• Disparate Skills –  Sometimes workers are not skilled enough for the job opportunities available. In such cases, people fear to be unemployed and take whatever they get their hands on.
• Lack of Work Experience – People may not have the required experience for a job they desire and may have to work in ancillary sectors where they do not utilize their skills fully. Workers may take up these jobs with a view to ultimately jump to the more skilled part of it once they have spent some time in the system.
• Immigrants with Non-Utilizable Credentials – When people move to new countries, the required skill-set can be different from what these people have, even when they have worked in the same industry for the same job in another country. Or it could be that the credentials they possess or the degrees they have are not recognized in the new country. Workers then have to familiarize themselves with the right skills or re-educate themselves to get the right credentials or degrees to get into a job they are skilled at.
• Poor Demand – Workers might be highly skilled but their skills can be of low demand in the local industries making these workers underemployed. Workers then have to move to another geography of re-skilling themselves for the available jobs.
• Economic Slowdown – An economic slowdown may puncture the business momentum resulting in large scale firings. In such a situation, workers stick to whatever jobs they have even when they are overqualified for the job. Due to the lack of any job opportunities outside their current jobs, workers may not find the right jobs even when they look actively for it.
• Structural Changes – New technologies and new ways of doing business can bring about a structural change in an economy, making the existing skill-set redundant and creating demand for new skill sets. Workers who will not be able to upgrade their skills may remain underemployed while the ones who upgrade get jobs matching with their skill sets.

Effects

This can lead to structural changes in the economy. Persistent underemployment may lead to reduced consumer confidence and hence reduced demand for goods and services further hitting the economy and job prospects.

Some workers may permanently down trade and chose to remain underemployed for the rest of their lives putting themselves in further misery. Some workers may completely drop off from the workforce and may not return to work, choosing unemployment over underemployment.

College graduates who were not able to get the desired jobs may find tough after being underemployed for some time to find the right jobs. Competition from newer graduates will also impact their chances to get jobs they are skilled in.

Underemployment vs Unemployment

While workers still remain employed, though sub-optimally, in underemployment, they are completely out of jobs in case of unemployment. Neither of the two is better, but underemployment is less of a devil than unemployment. Unemployment can accelerate the pace of economic slowdown, while underemployment will still contain it to an extent.

Conclusion

While some level of underemployment will always be prevalent in an economy, it is not in favour of a country’s economy if it is sustained and a lot of workers are working on sub-optimal capacity. This can create imbalances in an economy like a rich-poor divide, where few highly skilled workers will be much richer than the average underemployed.

There can also be a consumption slowdown, people may keep away from big-ticket purchases and the economy may stop humming and lose its momentum resulting in a prolonged slowdown or recession.

Recommended Articles

This has been a Guide to Underemployment and its definition. Here we discuss the formula to calculate underemployment rate along with its examples, types, causes & effects. You can learn more from the following articles –

• Loss Leader Pricing
• Frictional Unemployment
• Cyclical Unemployment
• Unemployment Compensation Definition
• Seasonal Unemployment