Underemployment

Underemployment defined as underutilization of skills

In one usage, underemployment describes the employment of workers with high skill levels in low-wage jobs that do not require such abilities. For example, someone with a college degree may be tending bar or driving a cab or being a cashier. Alternatively, a skilled machinist may be working at a fast-food outlet.

This may result from the existence of unemployment, which makes workers with bills to pay (and responsibilities) take almost any jobs available, even if they do not use their full talents. This can also occur with individuals who are being discriminated against, lack appropriate trade certification or academic degrees (such as a high school or college diploma), having such disabilites such as blindness or autism, or have served time in jail.

Another example of this is someone who holds high quality skills for which there is low market-place demand. Some examples of these types of skills include persons who have Ph.D's in literature or philosophy. While it takes great skill to acquire such academic credentials, they are valued very poorly by the marketplace, so these people often end up taking jobs that do not utilize their full education potential.

A related kind of underemployment refers to "involuntary part-time" workers, who could (and would like to) be working for the standard work-week (typically full-time employment means 40 hours per week) and can only work a fraction of this. Underemploment is more prevalent during times of economic stagnation (during recessions or depressions). Obviously, during the Great Depression of the 1930s, many of those who were not unemployed were underemployed.

These kinds of underemployment arise because labor markets typically do not "clear" using wage adjustment. Instead, there is non-wage rationing of jobs.

Underemployment defined as underuse of economic capacity

Underemployment can also be applied by regional planners to describe localities where economic activity rates are unusually low. This can be induced by a lack of job opportunities, training opportunities, or services such as childcare and public transportation. Such difficulties may lead residents to accept economic inactivity rather than register as unemployed or actively seek jobs because their prospects for regular employment appear so bleak. (These people are often called discouraged workers and are not counted officially as being "unemployed.") The tendency to get by without work (to exit the labour force, living off of relatives, friends, personal savings, or non-recorded economic activities) can be aggravated if it is made difficult to obtain unemployment benefits.

Relatedly, in macroeconomics, "underemployment" simply refers to excess unemployment, i.e., high unemployment relative to full employment or the natural rate of unemployment, also called the NAIRU. Thus, in Keynesian economics, reference is made to underemployment equilibrium. Economists calculate the cyclically-adjusted full employment unemployment rate, e.g. 4% or 6% unemployment, which in a given context is regarded as "normal" and acceptable. Sometimes, this rate is equated with the NAIRU. The difference between the observed unemployment rate and cyclically adjusted full employment unemployment rate is one measure of the societal level of underemployment. By Okun's Law, it is correlated with the gap between potential output and the actual real GDP. This "GDP gap" and the degree of underemployment of labor would be larger if they incorporated the roles of underemployed labor, involuntary part-time labor, and discouraged workers.

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