Underemployment is a multidimensional concept that refers to the underutilization of labor. The broadest conceptualization of underemployment refers to all dimensions of wasted ability of the eligible workforce. While this conceptualization would classify some of those not pursuing higher education as “underemployed” on the basis of wasted talents, most researchers adopt a narrower focus, taking the amount of human capital in the labor force as a given. Underemployment involves any combination of three related dimensions: (1) a time dimension, (2) a skills or qualifications dimension, and (3) a utilization or effort dimension. It should be noted that underemployment as referred to in this entry does not include unemployment, which could be considered the extreme underutilization of labor, where the individual is working zero hours but actively seeking employment.
Time Dimensions Of Underemployment
The time dimensions of underemployment involve different aspects of work time. First, this category includes individuals involuntarily working fewer hours than they would prefer to work. In general, this involuntary part-time employment refers to individuals working less than 30 hours per week, although an individual’s preference for working more hours can occur anywhere in the work time spectrum. Second, it includes involuntary temporary or intermittent employment that occurs generally over part of a year, as is often the case with seasonal work or limited-term contracts. Third, the time-related dimension can include involuntary retirement as reflected in those cases where such individuals would prefer to continue working but are inhibited from doing so perhaps because of a mandatory retirement policy in their organization.
The common aspect of these forms of underemployment is that the underemployed would prefer to work longer hours or longer periods during a given year or over their life cycle yet are not able to do so.
Skill-Related Or Qualification-Related Dimension Of Underemployment
The common aspect of the skill or qualification-related dimension of underemployment is that the individual’s skills are underutilized. This can occur for persons who possess surplus educational qualifications or credentials and are thus labeled as “overqualified” or “overeducated.” This terminology has been used both in relation to what is necessary in order to be hired and what is necessary for adequate job performance.
While some instances of overeducation clearly imply that a worker’s skills are underutilized, in other cases the issue is more ambiguous. For example, higher levels of formal education may serve to compensate for education of inferior quality or other human capital deficiencies such as lower literacy, ability, or work experience.
Utilization Or Effort Dimension
The utilization or effort dimension of underemployment involves the underutilization of labor in general, not just of their skills or qualifications. This can occur if firms engage in labor hoarding whereby redundant workers are retained rather than laid off. The underutilization may also occur with respect to the effort dimension more generally, if workers do not have the incentive or motivation to put forth effort and they effectively shirk.
Causes And Impacts Of Underemployment
Time-related underemployment generally occurs when the preferences of workers to work longer hours or longer periods during the year or over the life cycle do not correspond with the constraints imposed by employers. The extent of such underemployment may change over time, reflecting changes in the preferences of employees and the constraints of employers. For example, the growing number of dual-earner families may want shorter hours for one or both parents, in which case underemployment may dissipate if they prefer the shorter hours. In contrast, if employers increasingly want more part-time workers or limited-term contracts as part of the shift toward nonstandard employment, and this does not match the preferences of employees for such shorter work time, then underemployment will increase.
Explaining skills mismatch is somewhat challenging when firms and individuals are assumed to be optimizing agents that make full use of investments in training and education. One reconciliation of this disparity is that underemployment is a temporary phenomenon eliminated by market forces, with mismatches reflecting imperfect labor market information and job search costs. Underemployment may also be a short-term situation consistent with optimizing behavior when individuals voluntarily accept “inferior” positions under the impression that imminent promotions are likely.
Underemployment may be longer lasting, however, in the presence of labor market constraints or rigidities. For example, in the process of maximizing total family income, labor market choices of married women are often constrained by the decisions of their (generally more highly paid) husbands. Underemployment is often a long-term phenomenon for immigrant workers whose foreign credentials remain unrecognized by domestic licensing bodies.
According to job competition theory, individuals compete for scarce jobs on the basis of their educational credentials. Thus it could be rational for individuals to become “overeducated,” since those with the highest schooling are assumed to go to the front of the queue for the job openings. Furthermore, since wages are assumed to depend upon the job, rather than the forces of labor market demand and supply, there is no mechanism (i.e., changing wages) to eliminate underemployment.
From a worker’s perspective, underemployment can lead to reduced earnings, reduced job satisfaction, increased turnover, and the erosion or atrophy of skills. Some even define and measure underemployment in terms of reduced earnings relative to some reference group. Even low-skilled workers can suffer from underutilization of skills if their wages and job opportunities are adversely affected by a “bumping down” process. That is, when relatively skilled workers occupy jobs below their educational background, they “take away” jobs that could be adequately performed by less skilled workers, who are subsequently either forced into low-paying jobs or out of the working population.
Utilization or Effort Dimension
The underutilization of labor in general can occur during economic downturns when firms engage in labor hoarding whereby redundant workers are retained rather than laid off. The rationale for this is that when the cycle reverses, the workers are available and their human capital is not lost. When they are retained as redundant workers, however, they are likely underutilized and not working at maximal effort or efficiency in order to produce the desired output. This can contribute to the productivity decline that occurs during economic downturns.
Underemployment with respect to the effort dimension may occur, for example, if the compensation system is poorly designed or if employee involvement and commitment is low. Organizational productivity may decline as a result.
The measurement of some forms of time-related underemployment is fairly straightforward. For instance, in Canada’s monthly Labour Force Survey (LFS), “involuntary part-time” workers are identified. Other surveys like the General Social Survey (GSS) periodically ask individuals if they are involuntarily retired due to mandatory retirement. The extent of underemployment due to involuntary temporary or intermittent employment (e.g., seasonal work, limited-term contracts) does not appear to be commonly measured.
Four measures of skill-related underemployment are most common: (1) comparison of a worker’s educational attainment to the educational requirements for the occupation (as specified by job analysts), (2) comparison of a worker’s educational attainment with the education level that the worker believes to be necessary for either job entry or satisfactory job performance, the respondent’s perception of mismatch, and deviation from the average level of educational attainment within a narrowly defined occupation.
There is considerable debate as to which measurement approach is preferable. Some equate external assessment of job requirements with objectivity and hence view them as superior. On the other hand, so-called subjective measures relying on worker’s perceptions may incorporate the most accurate information about the job situation as well as the worker’s skills and credentials. Measures of underemployment due to labor hoarding in recessions or due to worker shirking or lack of effort are not done by conventional surveys. Rather, they tend to be done in periodic ad hoc studies.
- Borghans, L. and de Grip, A., eds. 2000. The Overeducated Worker? The Economics of Skill Utilization. Cheltenham, England: Edward Elgar.
- Livingstone, D. 1999. The Education-Jobs Gap. Boulder, CO: Westview Press.
- Muysken, J. and Ter Weel, B. 2000. “Overeducation and Crowding Out of Low-skilled Workers.” Pp. 109-132 in The Overeducated Worker?, edited by L. Borghans and A. de Grip. Cheltenham, England: Edward Elgar.
- Wald, S. 2005. “The Impact of Overqualification on Job Search.” International Journal of Manpower 26:140-153.