Disguised Unemployment

What Is Disguised Unemployment?

Disguised unemployment, also known as hidden unemployment, occurs when the productivity of additional employees is negligible or zero. This level of productivity implies that a larger number of employees are engaged in activities that aren't producing desired results.

This phenomenon explains the additional employment at workspaces for people engaged in activities that are no longer deemed profitable or productive.

Hidden employment has no effect on aggregate economic output and can occur when there are many workers for less productivity, and more employees filling work with fewer positions.

Within this broad bracket of unemployed people are also people in the workforce who have a job but are not actively contributing to production.

It is called so because they appear to have jobs but do not contribute to the aggregate economic output. Such individuals have very low productivity and may even hamper the company's production. It often occurs when too many people work on the same project.

Another way of looking at disguised unemployment is to consider individuals who are working jobs that are well below their level of skill. 

These individuals are part of the human capital that is not being used efficiently. As a result, they cannot contribute to economic production at their fullest potential.

Understanding Disguised Unemployment

Disguised unemployment is also characterized by a part of the population that is not employed at full capacity. This characterization also includes jobs with lower productivity or any category of workforce that is ready to work and capable but not currently searching for a job.

Disguised employment is most commonly found in rural areas where multiple, more than required farmers work on agricultural land, which happens to be the main source of income in these areas.

In urban areas, the same situation can be observed, but this time, instead of farmers, we see plumbers, painters, and electricians who work day in and day out to find regular employment. Not only are they unable to find regular work, but they also work less than their true potential.

Disguised unemployment is most common in developing nations, where there are many individuals ready to work but a lack of appropriate opportunities. 

Hidden unemployment can also be identified by looking for low productivity. The pattern also includes informal labor markets, farmers' markets, and the ability to consume a large number of laborers.

Types of Disguised Unemployment

There are different types of unemployment within disguised unemployment. This section briefly discusses three subtypes of this form of unemployment. But first, let us examine the following types of disguised unemployment.

Underemployment

Underemployment occurs when individuals with a high skill set accept jobs well below their skill level. As a result, their true potential is not fully utilized in this situation. 

In such cases, "hidden employment" can also be classified as underemployment as the individual is working at some capacity that is not sufficient. If the marginal product of each employee is negligible, they are likely underemployed.

It also applies to individuals who are working part-time but want to do a full-time job. They have the skills needed for a full-time job but have not yet been hired.

Sickness Or Disability

Individuals who are sick or have special needs but can contribute to the economy may be unemployed as they seek assistance for their disabilities. However, this unemployment is usually only temporary.

For example, this could be the case if a person is forced to leave work to undergo treatment but can return to work once the treatment is complete.

Similarly, a special needs person might have to leave work for a short time to seek medical help.

Such individuals are said to be disguisedly unemployed since they are often not included in the nation's unemployment statistics.

Not Seeking Work

If an individual stops looking for work, regardless of the reason, they are often not measured in a nation's unemployment statistics. Hence, they are also considered to be disguisedly unemployed.

For an individual to be seen as "unemployed," they should be actively looking for work at the time. Individuals who do not want to work are only disguisedly unemployed.

For instance, someone working a nine-to-five but decides, at the age of 40, to quit their job because they have enough money to financially support themselves and their family.

They would not be considered unemployed because they are not seeking out work. Instead, this person has chosen of their own free will to stop working and retire early.

Disguised Unemployment Example

To better understand the concept, let us consider the following examples.

Suppose Martín is a university graduate with a degree in engineering. However, due to a loose labor market, he cannot find a suitable job that requires his skill set.

Instead, Martín works as a full-time Uber driver, picking up and dropping off passengers at different locations within his neighborhood. Although Martín is working and generating an income, he is not utilizing his full potential to add to the economy. In other words, he is disguisedly unemployed.

Now, let us look at another example. 

Suppose Paula is a factory worker. She works alongside nine other employees who package biscuits at a biscuit factory. The overall output would remain the same if the factory laid off five employees. 

Paula and her colleagues are unemployed in this case as they do not individually contribute to the biscuit factory's production.

Although these are two very different examples, both scenarios described above can be classified as situations where unemployment is disguised.

Martín and Paula appear to be working, but neither improves the aggregate economic output by utilizing their full skill set.

Factors Contributing To Disguised Unemployment

So far, we have discussed disguised unemployment. But what causes this phenomenon to occur? Let's examine.

As you may have guessed, the leading cause of unemployment is too few job vacancies and many individuals looking for work. However, there are reasons why this situation may occur in the first place.

Some of the factors are discussed below.

Excess Population

If the country's population grows rapidly, it will have many excess workers. As more individuals are born and reach working age, more people are actively looking for employment.

However, job openings often do not grow at the same rate as the population. Ultimately, the number of people seeking a job increases while the number of positions to be filled relatively decreases.

Since job openings are comparatively few, many workers do not get the desired job. Instead, many individuals are forced to work underpaying jobs that do not match their full potential.

Lack Of Adequate Education, Training, And Infrastructure

The mismatch between the skills required and the jobs available in the market may cause individuals to stay unemployed or settle for jobs that don't match their education and skills. Apart from this, changing trends and skills requirements may cause the same.

Disguised unemployment can also occur for the reason of lack of proper roads, electricity, transport, and facilities to carry out employment.

Technological Advancement

Globalization encourages countries and businesses to share innovations as the world becomes more integrated. This act leads to the development of new technologies. Often, these technologies are far more efficient at certain jobs than traditional human labor.

For instance, it is much quicker and cheaper, in the long term, to employ a machine to manufacture handbags than it is to pay workers to do the same task. 

Although there may be some difference in quality, the cost advantage is typically enough to draw consumers to a cheaper product. This causes the demand for certain types of labor to fall, and workers are left looking for jobs in fields that do not match their expertise.

Occupational Immobility Or Lack Of Awareness

If an individual cannot travel to another city or country to look for better job opportunities, they are forced to take a less preferred job in their home country.

Similarly, individuals who are unaware of the job opportunities available elsewhere will pursue lower-paying jobs. These low-paying jobs can also contribute to hidden unemployment, which results from individuals taking up jobs for whom they are overqualified. 

This overqualification for the job can make the workforce underutilized.

Social And Political Factors

Dissatisfied youth and workforce from the government and their contributions towards unemployment may also result in a contribution towards hidden unemployment.

The lack of proper measures taken by the government to address the issue of unemployment will also lead to dissatisfied senior workers in the economy because proper measures are not taken to protect their employment.

This will lead to senior workers being unemployed or working at capacity less than expected by doing part-time jobs.

Low Capital Investment

A lack of capital investment in industries is likely to contribute to hidden unemployment. Capital investments are long-term investments in the economy that promote growth in various sectors.

Low investments in sectors can hinder growth. This forces employees to keep working in areas that will not bring any productive change to the economy.

Measuring disguised unemployment

The Current Population Survey (CPS), conducted by the U.S. Bureau of Labor Statistics (BLS) and the U.S. Census Bureau, is useful for measuring disguised unemployment.

The survey asks about 60,000 families questions about the employment and unemployment status of household members 16 years of age and older. 

Households must also report their earnings, the number of hours spent at work, etc., to better inform authorities of their status.

The various unemployment rates that the responses to these questions influence the BLS reports. A U-6 unemployment rate is also a useful tool for measuring real unemployment in the economy. It captures individuals working part-time, unemployed, or just marginally attached to the workforce.

Workers who want to work full-time but are only employed part-time are included in this unemployment indicator.

The only major drawback of this measure is that it does not account for full-time employees who work in positions that do not fully utilize their potential or that do not make use of their entire skill set.

Disguised Unemployment Prevention

There are several ways through which governments can overcome the issue of disguised unemployment. The following section discusses a few of them:

1. Encouraging Employment: Creating more job opportunities through federal spending on public projects is a helpful way of opening up more construction worker vacancies. However, as more projects are introduced, more labor is required to complete them.
   • Apart from this, the provision of unemployment benefits generates more demand for necessities like food and clothing since all benefits received must be spent.
2. Promoting Education And Skills Development: Initiatives to provide education and skills development programs to enhance the workforce's skillset and the ability to perform high-value jobs. Government-promoting internships, part-time training programs, and other boot camps can prevent hidden unemployment.
3. Promoting Employment In The Agricultural Sector: Improving the agricultural sector is another way through which countries, especially in developing economies, can increase employment.
   • The agricultural sector provides ample employment opportunities. Hence, investing in this sector to create more jobs may significantly reduce unemployment in the country.
4. Improving Labor Market Efficiency: One way we can contribute to preventing hidden unemployment is by improving labor market efficiency. This can be achieved by reducing skewed information and transaction costs, which help the workforce match the right skills with the right jobs.
   • Job fairs, recruitment agencies, and labor market intermediaries can enable this.
5. Promoting Economic Growth: Increasing investments, enhancing infrastructure, and reducing regulatory barriers may promote the creation of job opportunities can reduce hidden unemployment. 
   • Tax incentives, investment guarantees, and an improved business environment can contribute to the same.

Apart from these factors, if the economy is supported by encouraging labor market mobility, transparency, and flexibility, it can work wonders in terms of preventing hidden unemployment.

Summary

Disguised unemployment, sometimes referred to as hidden unemployment, happens when the productivity of extra workers is very low or nonexistent. This productivity level suggests that a greater proportion of workers are involved in non-productive activities.

Disguised unemployment refers to an individual who can work or is employed but is not improving production or is only partially utilized for available time or skills.

This type of unemployment is most commonly found in third-world or developing nations, where a large portion of the population is ready to work but cannot find appropriate job opportunities that meet the educational and skill requirements.

There are three main types of disguised unemployment:

1. Underemployment
2. Unemployment due to sickness or disability, and
3. Unemployment due to not actively looking for work.

Some of the possible ways that cause hidden unemployment include:

1. High population growth rate
2. Labor-intensive economy
3. Technological advancements
4. Occupational immobility, and
5. Lack of awareness about job opportunities

The Current Population Survey and U-6 unemployment rate are used to measure this type of unemployment.

Governments can utilize public funds and monetary policy to increase employment in the nation. In addition, unemployment benefits can also help stimulate the economy and generate more jobs.

In conclusion, understanding and measuring disguised unemployment is a complex economic concept that requires a comprehensive approach. The calculation takes various elements into account.

The required skills and capabilities, the availability of job opportunities, and productive workers are some of the most important elements in calculating hidden unemployment.

Policy and decision-makers employ a combination of different methods and approaches to gain a better understanding of the extent and impact of disguised unemployment. Then decisions are taken after the strategy is formed by keeping these variables in the picture.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Cyclical Unemployment

• Employment-to-Population Ratio

• Frictional Unemployment

• Natural Unemployment

• Structural Unemployment