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.

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