Underemployment: Definition, Causes, and Example

Underemployment is the total number of people in an economy who are unwillingly working in low-skill and low-paying jobs or only part-time because they cannot get full-time jobs that use their skills.

Underemployment, along with unemployment, is counted in U.S. government reports to provide a truer picture of the job market’s health.

Key Takeaways

• Underemployment measures employment and labor utilization in the economy, looking at how well the labor force uses skills, experience, and availability to work.
• It refers to individuals forced to work in low-paying or low-skill jobs.
• Visible underemployment and invisible underemployment are types of underemployment.
• Underemployment can be caused by economic recessions and business cycles.
• The unemployment rate is calculated based solely on the labor force, which does not include individuals not seeking a job.

Understanding Underemployment

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

There are two types of underemployment: Visible underemployment is when an individual works fewer hours than necessary for a full-time job in their chosen field. Due to reduced hours, they may work two or more part-time jobs to make ends meet.

The second type of underemployment is invisible underemployment. It refers to the situation where an individual cannot find a job in their chosen field and works in a job that does not match their skill set and pays much less than their customary wage.

A third type of underemployment refers to situations where individuals 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 Bureau of Labor Statistics’ (BLS) definition of "not in the labor force."

The number of these workers increased during the economic crisis and lockdown in early 2020, coinciding with a crash in the markets. Measuring this type of underemployment is statistically difficult.

Causes of Underemployment

Underemployment can be caused by several factors. During and after a recession, when companies downsize and lay off qualified workers, underemployment is prevalent. Underemployment reached its highest levels in the recession resulting from the global outbreak crisis.

According to a BLS report, the number of underemployed individuals in the U.S. economy decreased from 9 million in the fourth quarter of 2018 to 8.2 million in the same period a year later. Overall, the agency estimated that there were 95 million people not in the labor force (including discouraged workers who stopped looking for work) in Q4’19.

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

Weaknesses of the Unemployment Rate

The unemployment rate counts workers who are part of the labor force and actively seeking work but currently without it. While the unemployment rate receives the majority of the national spotlight, it can be misleading as the main indicator of the job market’s health since it does not account for the full potential of the labor force.

The U.S. unemployment rate was 13.3% as of May 2020, while the underemployment rate was 22.8%. The unemployment rate is defined by the BLS as "a percentage of the labor force (the sum of the employed and unemployed)." A measure of underemployment is needed to express the opportunity cost of advanced skills not being used or being underutilized.

Moreover, the unemployment rate is calculated based solely on the labor force, excluding persons not seeking a job. There are instances where a person is able to work but has become too discouraged with an unsuccessful job hunt to continue actively seeking a job. The labor force participation rate measures the percentage of the civilian population over 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 not utilizing their full skill set, and workers with part-time employment but desiring full-time employment.

Example of Underemployment

For example, an individual with an engineering degree working as a pizza delivery man as their main source of income is considered underemployed. Similarly, an individual working part-time at an office job but preferring full-time work is also considered underemployed. In both cases, these individuals are underutilized by the economy as they can potentially provide greater benefit to the overall economy.