Underemployment, a critical concept in Labor Economics, describes a situation where individuals are employed but not to their full capacity or potential. This means their current employment does not fully utilize their skills, education, or experience, or they are working fewer hours than they desire. Underemployment is a nuanced measure that offers a more comprehensive view of the health of the job market beyond the traditional unemployment rate. It highlights inefficiencies in the allocation of human capital within an economy, impacting both individual well-being and overall economic growth.
History and Origin
The concept of underemployment gained prominence as economists and policymakers sought a more complete understanding of labor market dynamics. While the traditional definition of unemployment focuses on those actively seeking work but unable to find it, it became apparent that this measure alone did not capture the full extent of labor market slack. The International Labour Organization (ILO), a United Nations agency, has been instrumental in standardizing the definition and measurement of underemployment globally. The ILO defines time-related underemployment as persons in employment who wanted to work additional hours, had worked less than a specified hours threshold, and were available to work additional hours given an opportunity for more work.11 The 16th International Conference of Labour Statisticians (ICLS) in 1998 adopted a resolution that expanded the international recommendations for measuring underemployment, moving beyond solely time-related underemployment to include other forms of inadequate employment, recognizing the underutilization of workers' productive capacity.10
Key Takeaways
- Underemployment occurs when employed individuals work below their skill level or fewer hours than they desire.
- It serves as a broader indicator of labor market health compared to the traditional unemployment rate.
- Underemployment can lead to reduced productivity and suppressed wage growth.
- Economic downturns, technological shifts, and structural changes in industries can contribute to underemployment.
- Policymakers and economists often consider underemployment when assessing the true amount of labor market slack.
Interpreting Underemployment
Interpreting underemployment involves understanding its various forms and their implications for individuals and the economy. It can manifest as "visible underemployment," where individuals work part-time but desire full-time employment, often due to a lack of available full-time positions. An example might be a recent college graduate working a few shifts a week at a retail store while seeking a career-track job. The other form is "invisible underemployment," which is more challenging to quantify. This occurs when individuals are employed full-time but in roles that do not leverage their skills, education, or experience. For instance, an engineer working as a data entry clerk is invisibly underemployed.
High levels of underemployment can signal broader economic issues, such as a mismatch between available jobs and the skills of the labor force participation rate, or a general deficiency in economic growth that limits the creation of quality jobs. It suggests that the economy is not fully utilizing its human resources, potentially hindering overall economic performance.
Hypothetical Example
Consider Maria, who holds a master's degree in environmental science. After graduating during a period of economic recession, she struggled to find a position in her field. Despite her advanced qualifications, the available jobs in environmental science were scarce, and those that existed required several years of experience she hadn't yet acquired.
To cover her cost of living expenses, Maria accepted a full-time administrative assistant role at a small firm. While she is employed, her current job primarily involves basic clerical tasks that do not utilize her scientific expertise or analytical skills honed during her master's program. In this scenario, Maria is underemployed. She is working full-time, but her role is well below her educational attainment and professional capabilities, representing a clear case of invisible underemployment. This situation illustrates how individuals can be employed yet still contribute to the broader challenge of underemployment within the economy.
Practical Applications
Underemployment data is a crucial economic indicator for policymakers, economists, and investors seeking a nuanced understanding of the business cycle and labor market health. Government statistical agencies, such as the U.S. Bureau of Labor Statistics (BLS), regularly publish alternative measures of labor underutilization, which include various forms of underemployment. The U-6 unemployment rate, for instance, is a widely cited measure that encompasses the total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percentage of the civilian labor force plus all marginally attached workers.9,8 This U-6 rate provides a more comprehensive picture of labor market slack than the official unemployment rate (U-3) by including individuals who are employed part-time but desire full-time work, or those who are considered "marginally attached" to the labor force.
Central banks, like the Federal Reserve, monitor these broader measures of labor underutilization when formulating monetary policy. A high U-6 rate, even with a seemingly low U-3 rate, might suggest there is still significant slack in the labor market, potentially influencing decisions regarding interest rates and quantitative easing.7 International organizations, such as the International Monetary Fund (IMF), also analyze underemployment to assess economic resilience and recommend structural reforms in advanced economies, particularly after major economic shocks.6
Limitations and Criticisms
Despite its utility, underemployment is subject to certain limitations and criticisms. One primary challenge lies in its subjective nature, particularly concerning "invisible underemployment." Quantifying whether an individual is truly working "below their skill level" can be difficult, as it often relies on self-assessment and the definition of what constitutes an appropriate match between skills and job requirements. For example, a recent college graduate may take a job unrelated to their major temporarily, but it may still offer valuable transferable skills or work experience.
Another critique is that official statistics, like the BLS's U-6 rate, primarily capture time-related underemployment (part-time for economic reasons) and may not fully encompass the extent of skill-based underemployment. Some research suggests that current measures might underestimate the total additional hours workers desire, even for those working full-time.5 This indicates that the reported underemployment figures might not capture the complete picture of labor underutilization. Furthermore, factors such as the rise of the gig economy and flexible work arrangements can complicate the traditional definitions of full-time and part-time work, making it harder to accurately measure underemployment. Persistent underemployment can also have broader societal impacts, contributing to income inequality and potentially limiting economic mobility.
Underemployment vs. Unemployment
Underemployment and unemployment are both indicators of labor market health, but they describe distinct situations. Unemployment refers to individuals who are without a job, are available for work, and have actively sought employment within a specified recent period. These individuals contribute to the official unemployment rate.4 The key characteristic of unemployment is a complete lack of work.
In contrast, underemployment applies to individuals who are employed but not optimally. This includes two main scenarios: those working part-time who desire full-time work ("visible underemployment"), and those working jobs that do not fully utilize their skills, education, or experience ("invisible underemployment"). While unemployed individuals generate no income from work, underemployed individuals do earn income, albeit often less than what their qualifications might warrant or from fewer hours than they prefer.3 The distinction is crucial because a low unemployment rate might mask significant underemployment, suggesting a healthier labor market than truly exists if many employed individuals are unable to find suitable or sufficient work.
FAQs
What are the main types of underemployment?
The main types are visible underemployment, where people work part-time but want full-time hours, and invisible underemployment, where people work full-time but in jobs below their skill level or education.
How does underemployment affect the economy?
Underemployment can reduce Gross Domestic Product and overall economic output because the economy is not fully utilizing its available skills and labor. It can also suppress wage growth and consumer spending.
Is underemployment worse than unemployment?
Both underemployment and unemployment indicate issues in the labor market. Unemployment means no income from work, leading to severe financial hardship. Underemployment means income is being earned, but the individual's potential is wasted, which can lead to frustration, reduced job satisfaction, and slower career progression. Many economists view underemployment as a hidden form of labor market inefficiency.
What causes underemployment?
Causes can include recessions, rapid technological advancements that displace certain jobs, an oversupply of skilled workers in specific fields, or structural changes in industries that lead to a mismatch between available jobs and worker qualifications.2
How is underemployment measured in the U.S.?
In the U.S., the Bureau of Labor Statistics (BLS) measures labor underutilization through various metrics, with the U-6 unemployment rate being the broadest. The U-6 rate includes the officially unemployed, discouraged workers, other marginally attached workers, and those employed part-time for economic reasons.1