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 or 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.

Understanding Underemployment

Underemployment is calculated by dividing the number of underemployed individuals with the total number of workers in a labor force.

There are two types of underemployment. Visible underemployment is underemployment in which an individual works fewer hours than is necessary for a full-time job in his or her chosen field. Due to the reduced hours, they work two or more part-time jobs in order to make ends meet. The second type of underemployment is invisible underemployment. It refers to the employment situation in which an individual is unable to find a job in his or her chosen field. Consequently, they work in a job that is not commensurate with their skill set and, in most cases, pays much below their industry standards.

A third type of underemployment refers to situations in which individuals, who are unable to find work in their chosen field, quit the workforce altogether, meaning they haven't looked for a job in the last four weeks per the BLS's definition of labor force participation. Their numbers skyrocketed during the 2008 recession as the economy reeled from the aftermath of a crash in the markets and a change in working conditions due to technological shifts. It is statistically difficult to measure the third type of underemployment.

Key Takeaways

  • 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.
  • It refers to a situation in which individuals are forced to work in low paying or low skill jobs.
  • Visible underemployment and invisible underemployment are types of underemployment.
  • Underemployment can be caused by a variety of factors, from economic recessions to business cycles.

Causes of Underemployment

Underemployment can be caused due to several factors. The period during and after a recession, when companies downsize and lay off qualified workers, is characterized by underemployment. Underemployment jumped to its highest levels in the recession following the financial crisis.

According to a BLS report, the number of underemployed individuals in the US economy rose from 7.2 million during the fourth quarter of 2008 to 9.2 million in the same period a year later. On an overall basis, the agency estimated that there were 28.9 million underutilized and unutilized (or discouraged workers who had stopped looking for work) in November 2009, the highest that figure had been since 1981-1982.

Another cause of underemployment is changes in the job market due to shifts in technology. As job descriptions change or are automated, laid off workers can be retrained or retired from the workforce. Those who do not have the resources or means to retrain themselves are generally susceptible to underemployment.

Business cycles can also result in underemployment. Seasonal staffing trends, especially in the hospitality industry, can result in more workers opting for the easiest available job and staying on. According to some estimates, nearly half of restaurant workers consider themselves underemployed.

Weaknesses of the Unemployment Rate

The unemployment rate counts those workers that are part of the labor force and actively seeking work, but currently without work. The unemployment rate receives the majority of the national spotlight, but 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 or skills being underutilized.

Furthermore, the unemployment rate is calculated based solely on 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 with an unsuccessful job hunt to continue 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.

Example of 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. Also, an individual who is working part-time at an office job but would prefer to instead work full-time is considered underemployed. In both cases, these individuals are underutilized by the economy as they, in theory, can provide a greater benefit to the overall economy.