Underemployment is defined as a situation where people are working fewer hours than they wish; e.g. you would like to work 40 hours a week, but the firm only gives you 30 hours. (Underemployment may also refer to the fact workers accept jobs that don’t utilise their skills. e.g. graduate working in McDonalds may be considered to be ‘under-employed’)
According to the Office for National Statistics, there are 2.8 million workers in Britain who are working less hours than they would like (link). This could include people forced to work part time rather than full time. This figure of underemployment has increased during the recession because firms have sought to avoid paying redundancy by reducing working hours and therefore cost of labour.
Underemployment does not have as many costs as official unemployment. But, it does mean the underemployed have lower incomes and so will spend less. Also, under-employment needs to be considered when evaluation the output gap in the labour market and output gap of the economy.
Under-employment in the great recession
A surprising feature of the current recession is the fact unemployment is relatively lower than we might expect. (see: UK unemployment mystery)
Part of the explanation is due to the issue of underemployment. This rise in underemployment may be due to:
- Low real wages, therefore workers need more hours to make up for low take-home pay.
- Firms cutting hours in order to cut costs and stay in business.
- Underemployment might be seen as an alternative to making workers redundant. It saves the firm having the costs of firing and later rehiring workers.
- Under-employment may indicate a more flexible labour market with firms able to change worker hours and not be tied by fixed contracts. In one sense workers benefit as unemployment is lower, but it also contributes to declining real wages.
This under-employment is an important indicator because it suggests spare capacity in the labour market and needs to be considered when examining the state of the labour market. For example, if demand in the economy increased, firms could increase hours of the under-employed to increase output, and not have to increase wages.
