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Underemployment generally refers to one of several situations that result in employment in an economically inadequate position. In this context the underemployment rate refers to the fraction of those employed who are “underemployed.” Some scholars utilize an alternative version of this definition by considering some nonemployed individuals as underemployed. Regardless of the definition of underemployment, the concept evolved from inadequacies in the unemployment rate in capturing work-related hardships (Jensen and Slack 2003, p. 25).
Ignoring for now the definition of underemployment that includes nonemployed individuals, the underemployed work while incurring some form of employment-related hardship. This includes individuals working in occupations with an insufficient number of hours, individuals working in positions with insufficient pay, individuals working in occupations below their levels of educational attainment, and individuals working in positions involving some combination of the above scenarios. Because they have employment they are not considered to be unemployed according to the standard definition of unemployment.
First, underemployment refers to a situation where employees work fewer hours than they desire. Such an event may occur because of real-world labor-market rigidities such as a fixed-hour workweek. For example, workers desiring a thirty-hour workweek at a job that requires forty hours for full-time employees or twenty hours for part-time employees will be considered underemployed if they accept the part-time position. A similar case occurs when workers accept part-time employment without choice, often referred to as “involuntary part-time.” This is the most widely cited reference to the underemployment rate, perhaps because it is easier to measure than the other types of underemployment. John Ham (1982) estimates that in the United States in 1970 over a quarter of the labor force was either unemployed or underemployed according to the hours worked measurement of underemployment.
Alternatively, workers may accept positions that offer the desired workweek but with low pay. In this case workers will be considered underemployed when their expected wages—based on personal (i.e., educational attainment, experience) and job-specific characteristics—are higher than their actual wages. This type of underemployment may occur within the context of either full-time or part-time employment. In a sense, workers accept such employment rather than become unemployed. Measuring the underemployment rate by this definition is difficult due to the need for an empirical estimation of one’s expected wage.
Some scholars consider all working-poor individuals to be underemployed, thereby eliminating the need for wage estimates. Such scholars would likely categorize a full-time employee earning the minimum wage as underemployed. Other researchers note that this need not be the case if the earnings of low-wage individuals are consistent with their level of human capital. Among those who consider all working poor as underemployed, a debate exists as to what the threshold level of income should be. Frequently a percentage of the official poverty threshold (either 100% or 125%) or a fraction of the median wage (from one-third to two-thirds) is utilized. Critics contend that such levels are arbitrarily determined.
Moreover, some workers are in occupations with an adequate workweek and pay but are not using all of their human capital, most notably by not fully using their educational qualifications. For example, individuals with a bachelor’s degree working in positions requiring only a high-school diploma are considered underemployed when compared to degree holders with higher-level jobs. As noted by Stephen Rubb (2005), the same individuals are considered “overeducated” when compared to others in their own occupational category. Measuring the underemployment rate by this definition is difficult due to the need for an estimation of the required level of education (and other human capital characteristics) for various occupations. Implicit in such a calculation of an “occupational mismatch” is the idea that all jobs within an occupational category are homogenous and that educational quality is uniform. Many scholars find such assumptions objectionable. Due to such complexities, researchers tend to focus on underemployment from other categories. A similar concept is “disguised unemployment” introduced by Joan Robinson (1937, p. 84) “where workers’ productivity is less than in the occupation they have left,” presumably because the worker’s new occupation does not make full use of their human capital.
It should be noted that many scholars (e.g., Jensen and Slack 2003) use underemployment to capture all forms of employment hardship, including those associated with nonemployment. As such, their definition of underemployment includes both discouraged and unemployed workers in addition to those employed in inadequate situations. For such scholars, the underemployment rate is the fraction of the labor force that is “underemployed” with a slight adjustment to include “discouraged workers” as part of the labor force. Discouraged workers are individuals who are neither employed nor looking for work, and typically they are not counted as part of the labor force. Using such a definition, Jensen and Slack find that in the United States in 2000 the overall underemployment rate was 13.5 percent, and that it was notably higher during the global recession in the early 1990s. In their model the most common type of underemployment is the working poor. This is followed by unemployment, insufficient hours, and discouraged workers as the second, third, and least common types of underemployment. They do not estimate the level of occupational mismatches in their calculation of the underemployment rate. Researchers who include nonemployed workers in their estimates of the underemployment rate tend to also automatically include working-poor individuals in their calculation. In general, their work tends to focus on issues involving the equitable distribution of income. Other researchers disagree with the inclusion of discouraged and unemployed workers in the estimates of the underemployment rate, contending that underemployment implicitly infers employment.
Bibliography:
- Ham, John C. 1982. Estimation of a Labour Supply Model with Censoring Due to Unemployment and Underemployment. Review of Economic Studies 49 (3): 335–354.
- Jensen, Leif, and Tim Slack. 2003. Underemployment in America: Measurement and Evidence. American Journal of Community Psychology 32 (1/2): 21–31.
- Robinson, Joan. 1937. Disguised Unemployment. In Essays in the Theory of Employment. London: Macmillan.
- Rubb, Stephen. 2005. Overeducation, Undereducation, and the Theory of Career Mobility: A Comment and a Note on Underemployment. Applied Economic Letters 12: 115–118.
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