What is 'Underemployment'

Underemployment is a measure of employment and labor utilization in the economy that looks at how well the labor force is being utilized in terms of skills, experience and availability to work. Labor that falls under the underemployment classification includes those workers who are highly skilled but working in low paying jobs, workers who are highly skilled but working in low skill jobs and part-time workers who would prefer to be full time. This is different from unemployment in that the individual is working but is not working at his full capability.

BREAKING DOWN 'Underemployment'

For example, an individual with an engineering degree working as a pizza delivery man as his main source of income is considered to be underemployed and underutilized by the economy as he, in theory, can provide a greater benefit to the overall economy if he works as an engineer. Also, an individual who is working part time at an office job instead of full time is considered underemployed because he is willing to provide more employment, which can increase the overall output.

Weaknesses of the Unemployment Rate

The unemployment rate, which receives the majority of the national spotlight, can be misleading as the main indicator of the job market's health because it does not account for the full potential of the labor force. The U.S. unemployment rate was 4.7% as of May 2016, but at the same time, the U.S. underemployment rate was 13.7%. The unemployment rate is defined by the Bureau of Labor Statistics (BLS) as including "all jobless persons who are available to take a job and have actively sought work in the past four weeks." As illustrated by the engineering major who works as a delivery man, a measure of underemployment is needed to express the opportunity cost of advanced skills not being used.

Furthermore, the unemployment rate is calculated based solely off the labor force, which does not include persons who are not seeking a job. There are many instances in which a person is able to work but has become too discouraged to actively seek a job. The labor force participation rate is used to measure the percentage of the civilian population over the age of 16 who is working or seeking work. The BLS compiles six different unemployment rates labeled U-1 through U-6. U-3 is the officially recognized unemployment rate, but U-6 is a better representation of the job market as it accounts for discouraged workers who have left the labor force, workers who are not utilizing their full skill set and workers who have part-time employment but would rather be employed full time.

RELATED TERMS
  1. Underemployment Equilibrium

    A condition where underemployment in an economy is persistently ...
  2. Unemployment Rate

    The percentage of the total labor force that is unemployed but ...
  3. Disguised Unemployment

    Unemployment that does not affect aggregate output. Disguised ...
  4. Skilled Labor

    A segment of the work force with a high skill level that creates ...
  5. Employment Situation Report

    A monthly report compiling a set of surveys in an attempt to ...
  6. Structural Unemployment

    A longer-lasting form of unemployment caused by fundamental shifts ...
Related Articles
  1. Insights

    How The Unemployment Rate Affects Everybody

    Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate.
  2. Personal Finance

    U.S. Labor Participation Rate at Record Lows

    In absolute terms, labor participation hit an all-time low.
  3. Insights

    The True Unemployment Rate: U6 Vs. U3

    Learn how to distinguish between the U-3 and U-6 unemployment rates, and explore which rate provides a truer picture of unemployment.
  4. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  5. Personal Finance

    Understanding the Unemployment Rate

    The unemployment rate is the percentage of people in the labor force who are unemployed but seeking a job.
  6. Insights

    Jobless Growth: Are You Prepared?

    Economic growth doesn't always mean employment growth. Learn about how the jobless growth economy affects workers and investors.
  7. Personal Finance

    Employability, The Labor Force And The Economy

    Individuals do not have absolute control of their employability since employability is also affected by market and economic conditions.
  8. Personal Finance

    What Qualifies as Full Employment?

    Full employment is an economic term describing a situation where all available labor resources are being utilized to their highest extent.
  9. Personal Finance

    Where Unemployment Hits Hardest

    A look at the demographics of unemployment, and what that means for workers around the nation.
RELATED FAQS
  1. What are some of the key shortcomings of how the U.S. unemployment rate is determined ...

    Understand how the unemployment rate reported by the BLS fails to account for people who have given up looking for jobs or ... Read Answer >>
  2. What is the key difference between the participation rate and the unemployment rate?

    Learn the key differences between the participation rate and unemployment rate, and how taken together, they can provide ... Read Answer >>
  3. How does the U.S. Bureau of Labor Statistics calculate the unemployment rate published ...

    Understand the process used by the U.S. Bureau of Labor Statistics to determine the official unemployment rate for the United ... Read Answer >>
  4. How does the Bureau of Labor Statistics determine the unemployment rate?

    Learn how estimates of the unemployment rate are made based on monthly surveys of American households that are conducted ... Read Answer >>
  5. Is there a natural rate of cyclical unemployment?

    Learn more about cyclical unemployment and find out about the relationship of cyclical unemployment to the natural unemployment ... Read Answer >>
  6. What are some causes of structural unemployment?

    Find out more about structural unemployment, what it is and examples of causes that can lead to structural unemployment in ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center