Underemployment

What is Underemployment?

Underemployment occurs when a person does not work full time or takes a job that does not reflect their actual training and financial needs. That is, their job doesn’t use all their skills and education, or provides less than full time work. This is not the same as unemployment, which refers to people who are not currently employed at all.

Calculating Underemployment

The formula for calculating underemployment is:

Who is Considered Underemployed?

Underemployment is divided into three common categories, as follows:

• Skilled workers in low-income jobs
• Skilled workers in jobs that don’t fully utilize their skills
• Part-time workers who would rather work full-time

Types of Underemployment

Two types of underemployment exist: visible and invisible.

1. Visible

Visible underemployment comprises employees who work fewer hours than what is considered normal in their field or industry. They possess the skills to work in a full-time position but are unable to find regular employment. They usually work part-time jobs to make ends meet.

2. Invisible

Invisible underemployment refers to people who work in jobs that don’t utilize their skills – such as a financial analyst working as a waiter in a restaurant. This type of underemployment is very difficult to measure and requires extensive research and surveys.

In addition, a third type of underemployment exists, which is called “marginally attached to the labor force.” It includes people who have looked for employment in the past year, who would like to work, and are available for work, but are “discouraged workers” or those who have given up looking for employment altogether because of their prolonged inability to find work.

Underemployment also includes people with full-time employment but who live below the poverty line. They are known as the “working poor.”

Causes of Underemployment

There are many factors that cause underemployment in an economy. Following are a few of the most common causes:

1. Business cycle

One of the main reasons for underemployment is the business cycle the economy currently operates in. If the economy is currently in a recession or economic depression, it is unlikely that organizations will be hiring for many full-time positions.

2. Supply and demand

Underemployment also occurs when the supply of workers is greater than its demand. A few reasons can be an increase in population growth or a decrease in the demand for a product.

When certain industries no longer need workers, people with the skills that match that industry may be forced to accept low-income jobs that don’t fully utilize their skills. For example, the decline of the coal industry has forced many former mining employees to look for work in other industries.

3. Technological changes

Sometimes technology takes the job of a worker who would have previously been employed in a position that has since become automated. For example, vending machines have taken the jobs of some cafeteria workers and cashiers, and ATMs have replaced some bank tellers.

Effects of Underemployment

Underemployment is a social problem that affects job growth, business growth, poverty levels, and the emotional and psychological health of the underemployed.

1. Poverty levels

When a person is forced to take up jobs that do not match their skills, they typically receive an income that is below their pay grade. With inadequate income, families do not consume as many goods and services as before.

The reduction in demand leads to slow business growth, pushing the economy toward a recession or depression due to low Gross Domestic Product (GDP) and little to no job growth. Many families who previously enjoyed a comfortable standard of living begin to struggle financially.

2. Structural unemployment

With underemployment, workers who no longer work in their chosen field lack the ability to update their skills with on-the-job training. Some people acquire skills in different industries while others drop out of the workforce altogether. This phenomenon is commonly known as structural unemployment.

3. Psychological problems

Underemployment can cause poor mental health. The stress and anxiety are a result of not being able to make ends meet, which creates a sense of inadequacy. Relationships with a partner can also suffer as a result of underemployment. Underemployment can seriously affect an individual’s mental and emotional health.

Conclusion

Youthful workers in the labor force tend to experience more underemployment as a result of switching jobs and moving into and out of the labor force. Many public policies can also discourage the creation of employment, such as a high minimum wage, high unemployment benefits, and a low opportunity cost associated with terminating workers.

Employment is the primary source of income for a person and hence, it is the source of economic growth. It is considered a lagging economic indicator. High underemployment suggests a low GDP and low demand for labor.

Other Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Annual Income
• Cyclical Unemployment
• Full Time Equivalent (FTE)
• New York Minimum Wage
• See all economics resources