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What is Underemployment?
Underemployment refers to a situation in which workers are employed but not in a capacity that fully utilizes their skills, experience, or availability. This includes individuals working part-time involuntarily or in jobs below their qualification level. Underemployment is an important indicator of labor market inefficiency.
Definition
Underemployment occurs when a worker’s job does not match their skills, hours desired, or economic needs, even though they are technically employed.
Key Takeaways
- Underemployment includes insufficient work hours or mismatch between skills and job roles.
- It is a broader measure of labor market health than unemployment.
- High underemployment signals structural or economic challenges.
Understanding Underemployment
While unemployment tracks people without jobs, underemployment captures workers whose jobs fail to meet their needs or capabilities. It can take several forms: part-time workers seeking full-time work, skilled workers placed in low-skill jobs, or employees earning below their potential due to limited opportunities.
Underemployment is particularly common during economic downturns. Companies may reduce hours or shift highly skilled workers into lower-tier positions to cut costs. It can also occur in developing economies where formal employment opportunities are limited.
High underemployment can indicate inefficiencies in education, skills planning, or economic policy. It may also reflect structural issues such as automation, industry decline, or regional disparities.
Formula (If Applicable)
Economists measure underemployment using:
- Underemployment Rate = (Underemployed Workers ÷ Total Labor Force) × 100
- Hours-Based Underemployment = (Desired Hours − Actual Hours)
Real-World Example
Following the 2008 global financial crisis, many advanced economies experienced spikes in underemployment. University graduates in countries such as Spain and Greece often worked in tourism, retail, or temporary jobs despite holding advanced degrees.
Importance in Business or Economics
Underemployment affects wage growth, productivity, and economic stability. It can:
- Depress consumer spending due to lower income.
- Reduce innovation by misallocating skilled labor.
- Increase labor turnover and dissatisfaction.
- Signal weaknesses in education or workforce development.
Governments and businesses track underemployment closely to shape labor policy, training programs, and workforce planning.
Types or Variations
- Skill-Based Underemployment: Worker is overqualified for the job.
- Time-Based Underemployment: Worker desires more hours.
- Income-Based Underemployment: Worker earns below their economic needs.
Related Terms
- Unemployment
- Labor Force Participation
- Human Capital
Sources and Further Reading
- International Labour Organization (ILO) — https://www.ilo.org
- OECD Employment Outlook — https://www.oecd.org
- World Bank Jobs Diagnostics — https://www.worldbank.org
- U.S. Bureau of Labor Statistics — https://www.bls.gov
Quick Reference
- Underemployment captures mismatches in hours, skills, or earnings.
- It impacts economic growth and labor productivity.
- Often rises during recessions or structural shifts.
Frequently Asked Questions (FAQs)
Is underemployment worse than unemployment?
Not necessarily, but it indicates deeper structural issues that unemployment alone may not capture.
Can underemployment exist in strong economies?
Yes. Even high-growth economies can experience skill mismatches or part-time job growth.
How can underemployment be reduced?
Through skills development, job creation, improving labor mobility, and economic diversification.
