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How Unemployment and Underemployment Affects the Economy: The American Perspective

Updated on July 13, 2021
Nyamweya profile image

Nyamweya is a Kenyan scholar who has done many years of research on a diversity of topics.

Overview of Unemployment and Underemployment in the USA

At the end of 2012, 8.3 million individuals in America were multitasking on jobs for reasons related to the poor economy (Levine, 2011, 56). By 2013, that number had doubled to over 10 million. The rate of unemployment for American youths between 20-24 years increased by 10% between March 2012 to May 2013. At the end of 2013, about 2 million jobless people had completed school.

Alpert (2013) observes that in recent perspective, cases of unemployment and underemployment have increased in both rural and urban areas. Owing to this aspect, more people are now working on family businesses, farms, hotels, and other forms of self-employment. Due to lack of employment avenues, individuals especially those with low qualifications resort to becoming peons, primary school teachers, waiters, porters, sales men and so on. Such professions are in most cases lowly paid and therefore, resulting in under-employment.

Apparently, underemployment essentially means that one has a job but the job does not satisfy their basic needs, or the particular job is not a full time one. Underemployment can be related in many ways to unemployment. This is because similar to unemployment; underemployment can result into a person’s life being severely downgraded. Underemployed people may not be able to effectively pay the necessary bills. This may make the person to turn to public assistance in order to obtain help.

The correlation between unemployment and GDP has been commonly referred as the Okun’s law. Okun’s law is essential the relation of the high national economic output with a decline in the number of unemployed people. This owes to the fact that in effectively increasing the economical output of any nation, people will need to work, thus, decreasing unemployment rate. Studies on the correlation of unemployment and GDP indicate that for every percentage point decline in the rate of unemployment, GDP increases by 2.5%. According to analysts, the major reason for this large coefficient in this correlation is that, an increase in economic output will subsequently lead into firms to not hire new employees but will make the current workers to work for extended hours. Additionally, there are some industries, that realize high returns in relation to scale where the impact of increasing the labor force on their output is multiplicative.

Globally, unemployment, underemployment or lack of work has been identified as a bad thing. Scholars and Economics have made convincing arguments that there is a particular natural degree of unemployment, and underemployment that cannot be eliminated altogether from the society. However, it has been found that high level of these aspects creates a significant cost on not only on the affected individual but also on the society and the country at large.

Before the emergency of the great recession, the average rate of savings in the perspective of U.S had been gradually decreasing to the lowest rates. Reports have also emerged that in this country, the average person is only a few meters away from serious financial problems without a regular job. The broader unemployment rate in U.S currently stands at 17.4%. On average, there are seven unemployed people on each available job in U.S. Even individuals, who may be eligible for unemployment benefits or other types of government help (such as food provisions), such kind of benefits in most cases, only replace about 50% of their regular income. This translates that these individuals and those who earns a low amount of money from their employments are consuming less than normal. The economic effect extends far beyond the less consumption. A lot more people would turn to retirement savings and eventually drain them as a long-term consequence.

In the perspective of EU nations, the rate of unemployment increased by 19% in 2012. This was attributed to emergency of another recession. Those mostly affected were the youth and young workers. During the same period, the unemployment rate for those aged 15-24 was 21.4%. Since 2010, the rate of unemployment has consistently risen in more than two thirds of European nations. A report issued by the Financial Post in 2013 articulates that over 80 million youths around the world have no stable income.

Discussion and Analysis

In the perspective of the national checkbook, unemployment has led to higher payments from the federal and state governments in paying the “victims” inform of unemployment benefits. At the end of 2012, such benefits amounted to over $330 billion including other benefits such as food assistance, Medicare, and Medicaid. Lebergott, (2011) observes that governments that experiences high rate of unemployment, underemployment and retirees are no longer realizing the same level of income tax before the increase in this rate. Owing to these aspects, governments have now turned to either borrowing money or cutting down their expenses on service provision.

According to Chang, (2009), the bad side of unemployment and under-employment has come to be imminent in the present perspective. For example, more than 70% produced by the U.S economy usual goes to unemployed workers and personal consumptions. This aspect has hampered the economy negatively by reducing the national GDP as well as tempering with the efficient resource allocation (113). A note should also be taken that high rate of unemployment also affect companies has well. This is because benefits relating to unemployment are largely financed by taxes evaluated on businesses. In the situation of high unemployment, governments will in most cases look on how to replenish their budget by increasing taxation on companies. Counter-intuitively, this will discourage organizations from investing in that particular country and hiring more employees or improving the pay of the existing workers. Further, companies will not only face low demand for their products but it will also be expensive for them to hire or retain workers.

Studies have found that unemployment and underemployment as being the lead cause for susceptibility in illnesses, malnutrition, loss of self esteem, mental illnesses and depression. A study conducted by Social Indicator Research established that even optimistic individuals found it difficult looking at the brighter perspective of things when they were not employed or in the case when they were not paid appropriately. This study used data and information from interviews from participants in German who were aged 16-94. The participants included those who were coping with actual life stresses and not just those who had volunteered. Among the major findings in this study was that even individuals who were optimistic struggled with the issue of being unemployed or underemployed.

Consistent unemployment subsequently leads to skill erosion, and essentially depriving the economy of the otherwise required talents. Similarly, the direct or indirect experience of unemployment changes the plan of employee behavior. Further, unemployment has also been known to cause great pessimism and skepticism concerning the value of education and training in education. In particular, it has led to many employees to be unwilling for a long-term investment in the job training which some jobs require. Apparently, lack of stable income has forced many families to deny education opportunities for their children and subsequently depriving the economy on such necessary skills.

Sloman, (2012) notes that the high level of unemployment has led to civil unrest and in other cases to civil unrest. For instance, the fall of the Weimar Republic in 1933 and the rise to power of Adolf Hitler subsequently led to World War 11 where many millions of people died and property destroyed in many parts of Europe. This revolution was claimed to have been caused by deteriorating economical conditions in German at that specific time. The main issue in particular was the high rate of unemployment, which had reached over 20% (241).

Both the media and the public of any nation have traditionally regarded an increasing level of unemployment as a factor that can surely led to electoral defeat of the existing government that oversees it. An example of this aspect can be derived from the 1983 consensus in United Kingdom. At this time, the Conservative party that was headed by Margaret Thatcher won the general election by a landslide. This landslide victory was attributed to the party’s concern on the rising cases of unemployment at that time.

A research carried out by Felice, (2009) found out that the use of welfare programs such as accumulating debt and food stamps did not essentially replace the income that one had been receiving from his or her job. Another study by Wilkins, (2011) was set to find out the impact of underemployment on various outcomes including welfare, and income dependence as well as the subjective well being. The authors employed information and data that had been gathered in 2001 by the Income, Household and Labor Dynamics in an Australia survey. The study findings suggested that while unemployment had a clear impact on various aspects of the political and economic sphere, underemployment was nonetheless related to equally significant effects on the outcomes associated with the unemployment. Further, the negative effects were associated to both full time employees and part time employee. However, this impact was particularly larger on the part of part time employees who wished to work full time. For part time workers who were seeking full time placements, the adverse impact that could be attributable to underemployment was not related for all outcomes that could be attributed to unemployment.

In accordance to Cordell, (2010) wages constitute one of the important factors with regard to calculation of the national income. If there is a high level of unemployment, the value of the wage component will be smaller, subsequently interfering with the value of the national income. In particular, income per capita is essentially a national income divided by the nation’s total population. This means that the high rate of unemployment will significantly reduce the value of the national income per capita.

The prevalence of chronic underemployment in a particular state can only assist in concealing the truth regarding employment situations. In the process of compiling statistics on employment, many nations would mostly come up with a basic figure of unemployed individuals, and employing such figure to measure the health of the job market. Studies have interestingly found that in most cases, such a figure does not include employees who are underpaid in their jobs. This is because; they are normally included among the list of employed people. Further, such a list does not also consider the qualification of these employed people. This is an indication of a fiercer competition for jobs than the reflection in the employment statistics.

A study conducted by the Gallup (2011) on the effect of underemployment on the highly educated Americans established that such effects were more adverse especially with those who had post graduate or college level degrees. The study authors requested underemployed participants to state whether they felt they were well of or not in their current jobs. Majority of the respondents (80%) stated that they were not well of or satisfied in their preset career. Less than half of the underemployed stated that they were. The frequency in discrepancy was 15%. Among respondents with diplomas or lesser certifications, less than half of them also stated to the affirmative. Gallup concluded that underemployment had a high impact on work and life satisfaction of highly educated men than those who are not well educated. This implies that their job performance in their respective job destinations was also jeopardized. Additionally, the research also noted that the most important problem in America was the issue of rising inequality

Analysis on the problems brought about by Unemployment and Underemployment

An economy that experiences high level of unemployment, and underemployment plus retirees who no longer have work to do does not effectively utilize all the resources, especially labor resources. Owing to the fact that the operations of such an economy are below its production possibility frontier, its output could have been higher if the entire workforce were fully utilized in the production process. Steininger and Rotte (2009),notes the existence of the tradeoff between unemployment, and economic efficiency. For instance, if those who were frictionally unemployed accepted the first job they encountered, there is a probability of them operating below their level of profession and skill, thus curtailing the efficiency of the economy. This is because if such people were put in their rightful profession, their skills and efficiency could be economically utilized.

In the context of extended unemployment period, the skills of workers acquired from education or training could get lost in the process. This will result into loss of human capital and resources. Prolonged unemployment also leads to a reduced life expectancy of employee by approximately seven years (Steininger and Rotte 2009, 90). Morever, unemployment has also been associated with the increased rate of crime on a nation’s economy. People who are not employed do not earn money to meet their financial responsibilities. Failure to pay their rents or mortgage payments may result into them being homeless through eviction or foreclosure. Such an example could be derived from U.S where the growing ranks of individuals who are made homeless through foreclosures have led to creation of tent cities in many urban areas.

Accordingly, many of the low-income jobs are not actually a better option than unemployment in a welfare state (which is depicted by provision of unemployment benefits). However, since it is not actually possible to obtain such benefits without having worked in the past, unemployment and jobs becomes more complimentary than substitutes. A combination of social responsibilities, lack of financial resources and unemployment will ultimately push those who are unemployed to turn into jobs that may not be befitting into their skills or be allowed to utilize their talents. Further, this leads to underemployment, and the fear of losing jobs can generate psychological anxiety. It can as well lead to a lack of self-esteem, depression and high rate of stress. Such people in most cases begin loosing social skills and contracts (Bockerman, and Ilmakunnas, 2009,78).

High and consistent unemployment with a subsequent increase in economic inequality has a negative impact on economic development. Unemployment hampers economical growth not only because it wastes resources but also because it generates re-distributive pressures, distortions, increased poverty rate, constraining liquidity limiting labor mobility, promoting social dislocation, conflict and unrest (Royuela et al 2012).

The actual impact of underemployment on a national economy or GDP has not however, been fully disclosed. This may be attributed to the difficult in measuring such an impact. However, many of the impact of unemployment to the economy may also be applicable on underemployment. Among these is the increasing level of poverty. With no sufficient income, households would not have much buying power. This translates to a reduced consumer demand, and slow businesses, as well as economic development. Consequently, the state’s gross domestic product GDP will decrease, similar to job growth.


It can be agreed that union activities and the minimum wage keep wages from falling. This also indicates that a higher number of people would want to sell their labor at the existing price but they do not manage. This therefore, assumes the existence of perfect competition where a single firm cannot influence the wage levels. Establishments of supply side policies and regulations could solve this by creating flexibility in the labor market. This would mean doing away with the minimum wage and diluting trade union powers. Such policies will subsequently increase the supply of goods as well as services, thus requiring more workers and therefore, expanding employment opportunities. Supply side polices including tax reduction on corporations and reduced regulations will be effective in creating more jobs and reducing the level of unemployment. Other supply side policies that need to be taken into consideration include offering quality education and training to make workers more appealing to employers.

States and governments should design programs that specifically aim at aiding the unemployed and those who have ceased to work. Such benefits may include provision of benefits such as unemployment compensations, unemployment insurance, to subsidies and welfare that will cater for their retraining. This will assist in alleviating short-term economic hardships, which these workers face. Most important is that such programs will give these workers time and empowerment in looking for other jobs. Without such empowerment, these people including the underpaid will continue to look for short-term measures just to satisfy their daily needs at the expense of long-term jobs.

Another solution to the issue of unemployment is for governments to fund employment programs for those who are able but poor. Such a program has been successful in countries such as Britain, which has realized a significant decline on the unemployed populace. In particular, Britain funded programs that were aimed at placing the unemployed, and those who were working in harsh conditions with poor wages. Another equally effective alternative is for governments to offer its citizens job guarantee. In this perspective, governments guarantee their citizens jobs at a living salary or wage.


Many governments are increasingly getting worried on the ramification of inflation. However, the issues of increasing rate of unemployment, underemployment and retirees have similarly become serious issues. A part from social disgruntlement and social unrest which unemployment creates in the society, high rate of unemployment, and underemployment has been found to have self- perpetuating negative effect on businesses and the economic stability of a nation. More worse is the fact that such effects are more subtle and long lasting. It should be known that business and consumer confidence are the main factors for economic recoveries. Moreover, employees would feel more confident in their future regarding investing in skill development and building their savings, thus leading to future economic growth.

The actual impact of underemployment on a national economy or GDP has not however, been fully disclosed. This may be attributed to the difficulty in measuring such an impact. However, many of the impact of unemployment to the economy may also be applicable on underemployment. Among these is the increasing level of poverty. With no sufficient income, households would not have much buying power. This translates to a reduced consumer demand, and slow business and economic development. Consequently, the state’s gross domestic product GDP will decrease, similar to job growth.


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