A Guide to Understanding Underemployment and Its Effects

By Indeed Editorial Team

Published July 24, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

In the labour market, there are several factors that might motivate you to seek a new role or explore a new career. This can happen if you're feeling that you're not using your skill set in the workplace or aren't advancing your current careers. Learning more about this type of employment can help you better understand this concept and how it might affect you. In this article, we define what underemployment is, explain how this can be invisible and visible, outline how it differs from unemployment, list some causes and consequences, and review some examples.

What is underemployment?

Underemployment, also known as underutilization, is a situation in which a person works, but not to their full potential. The term can apply to a variety of different circumstances, including when someone who's willing and able to work full time is only working part-time, or when someone is working in a role that doesn't use their skills and knowledge. You can classify both circumstances as visible and invisible underutilization.

Visible vs. invisible underutilization

The visible category refers to a situation where the employee's job doesn't meet their needs. For instance, they might hold multiple part-time jobs, or work at a very low-paying full-time job and take on additional part-time or freelance roles. Here, it's evident the individual's main source of employment is insufficient. While in the invisible category, this insufficiency may not be obvious. For instance, an employee can work only one full-time job that doesn't require their skills or educational background.

The difference between underemployment and unemployment

Underutilization refers to employee underperformance and may imply that the employer ignores the individual's proficiencies, work accomplishment, and experience. Unemployment refers to a situation where a person isn't working at all. Often, unemployment metrics receive more government and media attention, but underutilization is an important metric to consider as it measures the capacity at which the labour force is working.

Related: Understanding the Employment Rate Formula (And Its Benefits)

What are the causes of underutilization?

Here are the reasons why individuals may work below their capacity or ability:

Economic factors

The economy can have a significant impact on the number of underemployed individuals. Similar to unemployment, levels tend to rise after a recession and drop when the overall economy is strong. This is typically due to fewer jobs being available as companies look to reduce operating costs, or simply require fewer employees as consumer demand drops.

Technological advances

Developments in technology can significantly impact labour requirements for companies and industries. With the automation of tasks, companies often require fewer employees. This is particularly an issue in the manufacturing sector, where advancing developments in robotics and automation allow machines to do work that might otherwise require skilled human labour. When an entire sector adopts similar levels of automation, it may be difficult for professionals in that industry to find positions that use their skills and offer the level of pay they expect.

Related: What Is Workplace Automation? (With Benefits and Examples)

Business cycles

Business cycles can include seasonality and also changes in personnel requirements over the lifecycle of a company. Some seasonal businesses reduce hours or lay off employees during certain times of the year, or hire on a contract basis only during the times of the year when they require more employees. This can result in seasonal employees working only part-time during these periods, or taking other jobs that don't need their skills.

Related: What Is Seasonal Unemployment? (Examples and Tips)

Competition within labour pools

In certain industries, you may find a high degree of competition because many people with a particular set of qualifications want to obtain a few job positions that require their skill set. This situation may encourage numerous job candidates to find different job positions that don't require their qualifications. They may work outside their field, in a role within their field that doesn't fully utilize their skills, or in a part-time role.

Related: Everything You Need to Know about the Job Market (With Tips)

Personal or lifestyle factors

There are personal factors that can affect a person's employment status. For instance, there may not be enough jobs in their field within their locality, but they're unable to move due to family or financial circumstances. Another factor is the availability of childcare. For instance, a parent may work in a part-time role or in a position outside of their field to match their working hours with the hours of their child's school or daycare.

What are the impacts of underutilization?

There are a variety of wide-reaching impacts both on individuals and on the overall labour market. Some of these impacts are:

Employee discouragement

Sometimes an individual's employment status discourages them. This can happen if they don't feel any excitement about working in a role below their skill level or in a field outside of their interests. They may also feel frustrated due to being unable to earn sufficient compensation to match their abilities and training. This can sometimes result in complacency, where they stop looking for adequate work, and can also impact their overall morale and confidence.

Increased unemployment

Unemployment often relates to employee discouragement. Sometimes, underemployed individuals eventually decide to either leave the workforce or leave their insufficient job to focus on finding one that better suits their skills and experience. When an employee leaves the workforce, it doesn't affect the official unemployment rate, usually based on the number of people looking for work, so the overall impact may not be entirely obvious.

Financial losses

Typically, underemployed individuals earn less money compared to if they were working in a more appropriate role. This is because employees working outside their professional field often work in unskilled positions or in less senior positions. Financial losses can impact not only the underemployed employee but also their local economy, as they're unable to develop their full income potential.

Labour shortages

In some circumstances, underemployment can lead to labour shortages in certain fields. When roles within a particular industry are widely low-paying or part-time, employees may leave that industry. Sometimes they can even undertake new training and prepare for a different career. This can eventually create a labour shortage within a particular sector. For instance, in a locality where most hospitality work is seasonal, there may be a shortage of skilled restaurant employees as they may opt to work outside of their field in a year-round role.

Examples of underemployment

Here are a few examples of situations where a person is working, but not to their full potential:

Example of an electrician

Here's an example of an underemployed electrician:

Jane Lee is a trained and licensed electrician working in a convenience store as a clerk. There are several reasons why she is doing this, including a lack of available electrician work in her locality. She isn't fully utilizing their skills and knowledge, and her role doesn't relate to her training. The lower-skilled role, which is the convenience store clerk position, pays her a lower wage than her trade natural role. So, by working in the clerk role, Jane may be making a lower salary than if she were working in her field.

Example of a food and beverage server

Here's an example of an underemployed server:

Peter Poole is a food and beverage server who's available for a full-time job but he works in a part-time position. This is occurring because Pater is unable to find a job offering full-time hours and his current employer reduced hours due to a lack of business and budgetary concerns. Peter is evaluating whether to take on an additional part-time job to supplement his income, but in either case, he can describe himself as underemployed.

Example of a senior accountant

Here's an example of an underemployed accountant:

Alex Mertz is a senior accountant who works in an entry-level clerical job within a finance department after their previous employer laid them off because of a restructuring process. Although they're working in their industry, using part of their training and knowledge, they're not fully using their qualifications and experience. This also implies they're likely receiving a much lower salary than in their former position.

Explore more articles