What Is Underemployment Equilibrium?

When employment in an economy remains below full employment, and the economy has reached an equilibrium state that maintains an unemployment rate above what is deemed desirable, it is referred to as underemployment equilibrium, also known as under-employment equilibrium or below complete employment equilibrium. Because aggregate supply and aggregate demand are in balance at a point below total potential production, the unemployment rate in this situation continually stays above the natural unemployment rate, also known as the non-accelerating inflation rate of unemployment (NAIRU). According to Keynesian theory, an economy experiences a prolonged depression when it falls into an underemployment equilibrium.

In this context, “underemployment” means that overall employment is lower than full employment. The word “underemployment” describes employed people who work fewer hours than they would want to or in positions that pay less and demand fewer abilities than their experience and degree would suggest. Suppose people not acquainted with economics sometimes need clarification on these two meanings. In that case, underemployment is not connected to an underemployment equilibrium, even if it may be included as one component of the overall unemployment rate.

An Understanding of Equilibrium Underemployment

When an economy reaches long-term equilibrium, full employment is considered occurring. An economy generates less than it does at full employment or below full employment. The fact that there is underemployment indicates that the economy’s actual and potential production differ.

According to Keynesian macroeconomic theory, an economy may get permanently trapped when it finds a new equilibrium between aggregate supply and aggregate demand with a lower total production volume when it enters a recession due to a condition of total employment. The first Keynesian explanation was based on the theory that fear and uncertainty during a recession might lead investors and firms to cut down on investment in favor of retaining cash or other liquid assets for an extended period.

As a result of lower investment in capital goods, there would be a decrease in aggregate demand, and if employment and overall production declined, there would also be a decrease in aggregate supply. Because of this, the economy may enter a persistent condition of high unemployment as aggregate supply and demand find a new equilibrium at a lower level of production and employment rather than rebounding from a brief recession.

This theory is different from others, like the Walrasian general equilibrium, which says that once the recession and the nasty natural and financial shocks that came with it are over, the economy will return to equilibrium at full employment (minus a natural rate of unemployment) through changes in prices and entrepreneurs taking advantage of opportunities. Keynes challenged these beliefs, and subsequent Keynesian economists developed other theories—like price stickiness—to explain why markets would not return to full employment during a recession. Proponents of Keynesian economics believe that deficit spending in the fiscal sector and, to a lesser degree, monetary policy to boost the economy are the best ways to resolve an equilibrium condition of underemployment.

Underemployment and its Equilibrium

The phrase “underemployment” describes a kind of underutilization of labor in which an employee gets paid but is not working as much or as productively as they would want. Underemployed people may have low-skilled, low-productivity employment while having more advanced abilities, certifications, or experience, or they may be doing part-time jobs when they would want to work full-time.

In addition to joblessness, broad measurements of unemployment published by official statistics organizations may also account for underemployment. In addition to having many of the same reasons as unemployment, underemployment is sometimes caused by a mismatch between the skill and educational requirements of open positions or an excess of higher education compared to work prospects. However, underemployment is unrelated to the idea of an underemployment equilibrium. Therefore, the two concepts should be distinct despite contributing to the overall labor underutilization rate.

Conclusion

• An economy that consistently experiences greater than average unemployment is said to be in an underemployment equilibrium.
• In this situation, persistent unemployment exists because the economy has stabilized at a macroeconomic level below its potential production.
• A vital component of the Keynesian idea of how a recession might result in a chronic depression in an economy is the underemployment equilibrium.
• “underemployment” describes a specific aspect of unemployment and is not synonymous with an underemployment equilibrium.