Definition of underemployment equilibrium

What is the underemployment equilibrium?

The underemployment equilibrium, also known as the underemployment equilibrium or equilibrium below full employment, is a condition in which employment in an economy persists below full employment and the economy has entered a state of equilibrium that maintains a rate unemployment above what is considered desirable. In this state, the unemployment rate remains constantly above the natural rate of unemployment or the unaccelerated inflation rate of unemployment (NAIRU) because aggregate supply and aggregate demand are in equilibrium at a point below potential output. total. An economy that is installed in an equilibrium of underemployment is the way in which Keynesian theory explains the occurrence of a persistent depression in an economy.

The term “underemployment” in this sense simply refers to the fact that total employment is below the level of full employment. Underemployment itself is a different term that refers to employed workers who work fewer hours than they would like or in jobs that require fewer skills (and often have a lower salary) than their level of education and experience would indicate. Underemployment can be included as a component of the overall unemployment rate, but is otherwise unrelated to the equilibrium concept of underemployment, although these two uses are often mistakenly confused by those unfamiliar with economics.

Key takeaways

  • The underemployment equilibrium describes a state in an economy where unemployment is persistently higher than usual.
  • In this state, the economy has reached a macroeconomic equilibrium point somewhere below total potential output, resulting in sustained unemployment.
  • Balancing underemployment is a classic part of Keynesian theory of how recession can lead to persistent depression in an economy.
  • Underemployment itself is a different term that refers to a possible component of unemployment, but is otherwise unrelated to the idea of ​​an underemployment equilibrium.

Understand the underemployment balance

An economy in long-term equilibrium is one that is said to be experiencing full employment. When an economy is below full employment, it is not producing what it would have if it were at full employment. This state of underemployment means that there is a gap between actual and potential production in the economy.

In Keynesian macroeconomic theory, when an economy, for whatever reason, falls into a recession from a state of full employment, it can get stuck in a persistent situation where it finds a new equilibrium between aggregate supply and aggregate demand with a volume lower total. output. The original Keynesian explanation for this revolved around the idea that the uncertainty and fear in the wake of a recession could induce companies and investors to reduce their investment level in favor of holding cash or other liquid assets more or less. less permanent.

This reduction in investment would lead both to a reduction in aggregate demand due to the reduction in investment spending on capital goods and to a reduction in aggregate supply as the level of employment and general production fell. As a result, the economy will not recover or recover from a temporary recession, but could settle into a stable state of high unemployment as aggregate demand and supply reach a new equilibrium at a lower level of output and employment.

This theory contrasts with others, such as the Walrasian general equilibrium, which suggests that through the adjustment of prices and the actions of entrepreneurs seeking opportunities, the economy will adjust again towards equilibrium at full employment (minus some natural rate of unemployment). once the recession and associated negative real and financial shocks have passed. Keynes challenged these theories, and subsequently Keynesian economists provided further explanations for why markets might not adjust toward full employment after a recession, such as the idea of ​​price stickiness. Proponents of Keynesian economics suggest that a solution to an equilibrium state of underemployment is a fiscal policy of deficit spending and, to a lesser extent, a monetary policy to stimulate the economy.

Underemployment vs Underemployment Balance

The term “underemployment” refers to a type of labor underutilization in which a worker is employed, but does not produce at his or her full potential or work as much as he would like. Underemployed workers may be working part-time jobs when they would prefer to work full-time, or they may be working low-skilled, low-productivity jobs while possessing more advanced skills, educational credentials, or experience.

General measures of unemployment reported by government statistical agencies may take into account underemployment in addition to unemployment. Underemployment can have many of the same causes as unemployment, but is often also the result of an oversupply of higher education relative to job opportunities or a mismatch of skills and education to available jobs. However, beyond its contribution to the total rate of labor underutilization, underemployment itself is not related to the equilibrium concept of underemployment and the two terms should not be confused with each other.

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Mark Holland

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