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.

  1. Disguised Unemployment

    Disguised unemployment is unemployment with low productivity ...
  2. Civilian Labor Force

    Civilian labor force is a term used by the Bureau of Labor Statistics ...
  3. Discouraged Worker

    A discouraged worker is someone eligible for employment and able ...
  4. Unemployment

    Unemployment occurs when a person who is actively searching for ...
  5. Employment Situation Report

    A monthly report compiling a set of surveys in an attempt to ...
  6. Full Employment

    Full employment is a situation in which all available labor resources ...
Related Articles
  1. 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.
  2. Insights

    Jobs Beat Forecasts, But "Real" Unemployment Rises

    The "real" unemployment rate, which accounts for discouraged and temporary workers, rose to 9.7% in July from 9.6% the month earlier
  3. Insights

    Leading Economic Indicators: U.S. Bureau of Labor Monthly Stats

    The Bureau of Labor Statistics' monthly employment figures are a key economic indicator. Here's how they work.
  4. Personal Finance

    4 Way to Move Beyond Long-Term Unemployment

    The long-term unemployed should reach out for personal help, career advice and consider new job options to get back into the workforce
  5. Personal Finance

    6 Sectors That Are Creating Jobs

    While many sectors are shedding jobs and fueling unemployment, these six have been hiring new workers.
  6. Personal Finance

    America’s Labor Market: Hidden Distortions and Uncertain Forecasts

    Employment reports released by the Bureau of Labor Statistics have a profound impact on political, business, consumer, and investor behavior.
  7. Personal Finance

    MBA Skills: What Employers Are Really Looking For

    To make sure that you have what recruiters want, take a look at Bloomberg's annual job skills survey.
  8. Insights

    Will You See Higher Wages In 2015?

    It's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
  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. 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 >>
  3. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  4. 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 >>
  5. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two and their main characteristics. Read Answer >>
  6. How does automated work affect structural unemployment rates?

    Learn about structural unemployment, one of the main causes of structural unemployment, and how automated work increases ... Read Answer >>
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center