Hidden unemployment refers to people who are unemployed, but not reflected in official unemployment rates. It includes those who stopped looking for work due to discouragement and those who worked but were underused. Sometimes, the term hidden unemployment is also called disguised unemployment.
Break down the components of hidden unemployment
Hidden unemployment comprises two types of unemployment:
- Underemployed workers
- Discouraged workers
Both are working-age population, but they are excluded from the calculation of the unemployment rate.
Underemployed workers emerge when they have the qualifications to do a job with a much higher salary than what they currently do. General proxies of underemployed workers are those who have part-time jobs. However, in more detail, economists refer underemployed workers to the following categories:
- Part-time workers. It refers to the type of work with fewer working hours than full-time work. Even though workers have been looking for a full-time job, they may only find part-time employment.
- Overqualification workers. Overqualification occurs when workers underuse their core skills or abilities. An example is a teacher who now works as a taxi driver because he cannot find vacancies in schools.
- Overstaffing. It occurs when the employee is not currently employed to produce goods or services for reasons such as seasonal work or other reasons. Therefore, they work less than what is considered normal hours in their field or industry.
Economists usually also divide underemployment into two groups: visible unemployment and invisible unemployment. Visible unemployment includes unemployment due to overstaffing and part-time reasons. Meanwhile, invisible unemployment covers those because of overqualification.
Causes of underemployment
The problem of underemployment often arises because there are not enough jobs available. This situation usually occurs when economic growth is too low or even worse in a recession. Job creation is low because many companies try to rationalize efficiency.
Businesses face weak demand for their products. To maintain operations, they may offer more temporary job vacancies than full-time job vacancies. The aim is to rationalize operating costs.
For those who are unemployed, for example, a part-time job is the best alternative before finding a full-time job. By taking part-time jobs, at least they can still earn income.
Low labor mobility between regions is another factor that magnifies the impact of underemployment. Business activity in some areas can grow higher than others. If workers are immobile, for example, for transportation reasons, workers in low-growth areas will likely choose part-time jobs. Removing geographical barriers to labor mobility within the region is the solution to this problem.
A further cause is the inadequate availability of job information. This situation can lengthen underemployment. The lack of job vacancy information makes it difficult for unemployed workers to find the desired job. Therefore, perhaps more workers will accept part-time or non-qualified work.
Overqualification is usually when the skill or expertise is very specific. Or, this can also happen because the salary reservation requested by job applicants is very high. Therefore, supply can be far higher than the demand. Among the examples of jobs that offer high salaries, but low demand is legal jobs, investment bankers, and information systems managers.
Another general situation that can cause underemployment is immigration. When highly trained immigrants arrive in the destination country, they may find it challenging to find new jobs due to high competition or credential reasons. As a result, when, for example, engineers from other countries immigrate, they may not be able to work in their profession.
Unemployment includes those who have stopped looking for a job. Their numbers often increase during prolonged recessions. Difficult economic activity inhibits unemployment to find the right job immediately. Then, because it was difficult to find work, they became desperate. They are excluded in calculating the official unemployment rate because they do not work and are not actively looking for a job.
Causes of discouragement
When the economy goes into recession, job openings are few; workers become frustrated because of the difficulty in finding a job. So, more workers tend to be discouraged.
They gave up looking for work for several reasons:
- Lack of demand for employment or workers thinks demand for their skills is not available. Or, they become frustrated because they don’t immediately find a job.
- Workers do not have the expertise that business demands. Lack of education or skills causes unemployed workers to give up. This situation usually occurs when there is a mismatch between the education system and the labor market.
- Discrimination due to reasons such as race, sex, religion, and disability
Effects of hidden unemployment
Hidden unemployment can cause poor mental and emotional health, especially for those who are unemployed. People feel frustrated when they haven’t found the job they want. Plus, the salary earned is lower than expected. They may feel they have wasted time and received less money than they should. This situation can eventually cause high stress and anxiety.
Misleading unemployment number
The existence of discouraged unemployment can have negative consequences in describing the conditions of unemployment. Because they are not actively looking for work, the government expels them from the labor force. Difficulties arise, especially during a severe recession, because many workers become discouraged after failing to find a job and leave the labor force. As a result, the unemployment rate data understates the unemployment problem.
Likewise, official unemployment data regards part-time workers as full-time workers. They often don’t work at their best in producing products and are willing to work full time. Economists consider them to be semi-hidden unemployment and should, therefore, be excluded from the unemployment rate.
Increase structural unemployment
Hidden unemployment can cause structural unemployment. Unemployed workers no longer work by utilizing their best abilities. They cannot update their skills with appropriate training. This situation, of course, can hinder them when they apply for the type of job that suits to their old abilities without training. In aggregate, this can reduce the ability of the economy to produce more goods and services.
Poverty and social problems
Hidden unemployment contributes to increasing unemployment and poverty. Although workers can find part-time work, part-time wages may not be large enough for what they expect. Likewise, when someone is forced to take a job that is not following their skills, they will undoubtedly receive an income below their reservation salary.
With inadequate salaries, household income is lower. They will not consume enough goods and services and tend to save money. As a result, reduced household demand causes a slowdown in business and economic growth.