Underemployment: Definition, Causes, and Example

Underemployment is a measure of 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 as well as unemployment is counted in U.S. government reports in order to provide a truer picture of the health of the job market.

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 underemployment in which an individual works fewer hours than is necessary for a full-time job in their chosen field. Due to the reduced hours, they may 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 their chosen field. Consequently, they work in a job that is not commensurate with their skill set and, in most cases, pays much below their customary wage.

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 Bureau of Labor Statistics' (BLS) definition of "not in the labor force."

The number of these workers skyrocketed during the onset of the economic crisis and lockdown in early 2020, which ultimately resulted in a substantial change in working conditions and coincided with a crash in the markets. It is statistically difficult to measure the third type of underemployment.

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 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 during the fourth quarter of 2018 to 8.2 million in the same period a year later. On an overall basis, the agency estimated that there were 95 million people not in the labor force (including discouraged workers who had 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 from the workforce. Those who do not have the resources or means to retrain themselves are generally susceptible to underemployment.

Weaknesses of the Unemployment Rate

The unemployment rate counts those workers who are part of the labor force and actively seeking work but are currently without it. The unemployment rate receives the majority of the national spotlight, but that 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, but at the same time, the U.S. underemployment rate was 22.8%. The unemployment rate is defined by the BLS as including "as a percentage of the labor force (the labor force is 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.

What's more, 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.