What Is Underemployment Equilibrium?
Let me explain to you what underemployment equilibrium is. It's also known as under-employment equilibrium or below full employment equilibrium, and it describes a situation in an economy where employment stays below full levels, and the economy has settled into an equilibrium that keeps unemployment higher than what's ideal. In this state, the unemployment rate is consistently above the natural rate or the non-accelerating inflation rate of unemployment (NAIRU), because aggregate supply and demand balance out below the economy's full potential output. This is how Keynesian theory accounts for a persistent depression in an economy.
Here, 'underemployment' just means total employment is below full employment. But underemployment as a separate term refers to workers who are employed but working fewer hours than they want or in jobs below their skill level, often with lower pay. It might factor into broader unemployment measures, but it's not the same as underemployment equilibrium, and people new to economics often mix them up.
Key Takeaways
- Underemployment equilibrium describes a state in an economy where unemployment is persistently higher than usual.
- In this state, the economy has reached a point of macroeconomic equilibrium somewhere below full potential output, which results in sustained unemployment.
- Underemployment equilibrium is a classic part of the Keynesian theory of how recession can lead to persistent depression in an economy.
- Underemployment by itself is a distinct term that refers to one possible component of unemployment but is otherwise unrelated to the idea of an underemployment equilibrium.
Understanding Underemployment Equilibrium
You should know that an economy in long-run equilibrium is at full employment. When it's below that, it's not producing as much as it could, creating a gap between actual and potential output. This underemployment means resources aren't fully used.
In Keynesian theory, if an economy slips into a recession from full employment, it can get stuck in a new balance of aggregate supply and demand at lower output. Keynes originally pointed to uncertainty and fear after a recession, leading businesses and investors to cut investments and hold cash instead.
This drop in investment reduces aggregate demand from less spending on capital goods and cuts aggregate supply as employment and output fall. So, the economy doesn't recover from a short recession but settles into high unemployment, with supply and demand equilibrating at lower levels.
This contrasts with theories like Walrasian general equilibrium, which say prices adjust and entrepreneurs act to return the economy to full employment after shocks pass. Keynes challenged this, and later economists added ideas like price stickiness. Keynesians recommend fiscal deficit spending and some monetary policy to stimulate out of this state.
Underemployment vs Underemployment Equilibrium
Let me clarify the difference for you. Underemployment is about labor under-utilization where a worker is employed but not at full potential—maybe part-time when they want full-time, or in low-skill jobs despite higher qualifications.
Government stats might include underemployment in broad unemployment measures. It can stem from the same causes as unemployment, plus things like too much higher education for available jobs or skill mismatches. But beyond adding to overall labor under-utilization, underemployment isn't connected to underemployment equilibrium, so don't confuse the two.
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