Disguised Unemployment

 People in the workforce who have a job but are not actively contributing to production.

As we skim through the newspaper every morning, we have all come across the term "unemployment" and are familiar with its negative connotations. But what exactly is unemployment? And is there more than one type of unemployment?

Unemployment refers to a situation where individuals who are willing and able to work cannot find it. In other words, an unemployed individual is actively looking for a job but cannot find one.

Within this broad bracket of unemployed people are also people in the workforce who have a job but are not actively contributing to production. This act is known as disguised unemployment. 

It is called so because they appear to have a job but do not add 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.

To better understand this economically, we need to consider the law of diminishing marginal productivity. According to this concept, as the number of inputs (in this case, human capital) increases, total productivity first increases and then decreases.

Essentially, the cost advantage of producing an additional unit of output decreases.

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.

This act contrasts with people who cannot find work due to a lack of skills.

Types of disguised unemployment

There are different types of unemployment within disguised unemployment. This section briefly goes over three subtypes of this form of unemployment. But, first, let us have a look.

1. 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.

2. 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 considered a part of the nation's unemployment statistics.

3. 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.

Some examples

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.

Potential causes and explanations

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

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.

1. High population growth

A country will face many excess workers if there is a high population growth rate. As more individuals are born and reach the working age, more people are actively looking to be employed.

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.

2. Labor-intensive economy

Due to the high number of people looking for jobs, labor is cheap and easy to find. This leads to companies employing more people than necessary for a particular position.

3. 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, this technology is 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.

4. 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.

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.

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

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.

Prevention Measures

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

  1. Creating more job opportunities through federal spending on public projects is a helpful way of opening up more vacancies for construction workers. However, as more projects are introduced, more labor is required to complete them.

  2. The provision of unemployment benefits generates more demand for necessities like food and clothing since all benefits received must be spent.

  3. Groceries and retail stores respond to the increased demand by employing workers to keep the stores running smoothly. If there is a massive increase in foot traffic, brick-and-mortar stores will need to hire more in-store staff to cater to customers' needs.

  4. Improving the agricultural sector is another way through which countries, especially in developing economies, can increase employment.

  5. The agricultural sector provides ample opportunities for those looking for employment. Hence, investing in this sector to create more jobs may significantly reduce unemployment in the country.

Finally, decreasing interest rates can help prevent disguised unemployment. Reducing the interest rate to increase the money supply generates liquidity and makes it cheaper for banks to give out loans.

As credit becomes cheaper, individuals can borrow money from banks to fund a business idea.

Already existing businesses can also borrow funds to expand their operations, thus paving the way for more jobs in the economy and allowing an increased number of individuals to utilize their skills in the workforce.

Summary

The following section recapitulates what we have learned throughout this discussion on disguised unemployment. Mentioned below are our key takeaways:

  • 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.

  • There are three main types of disguised unemployment - underemployment, unemployment due to sickness or disability, and unemployment due to not actively looking for work.

  • High population growth rate, a labor-intensive economy, technological advancements, occupational immobility, and lack of awareness about job opportunities are all possible causes of this type of unemployment in an economy.

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

  • The standard unemployment rate does not account for individuals with jobs that do not match their potential or situations where more people are employed than required for the task.

  • 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.

Venture Capital Course

Everything You Need To Break into Venture Capital

Sign Up to The Insider's Guide by Elite Venture Capitalists with Proven Track Records.

Learn More

Researched and authored by Rhea Bhatnagar | Linkedin

Reviewed and edited by Tanay Gehi | Linkedin

Free Resources

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