The underemployment problem

It is unambiguous that the Australian economy is in an enviable state. All the key parameters—inflation, unemployment, growth—are more or less where we want them. However, where Australia falls away from being a world leader is in the often forgotten measurement of underemployment.

The Australian Bureau of Statistics (ABS) classifies anyone who is currently employed, but wants more work and cannot find it, as underemployed. It may be preferable to unemployment, but it is far from ideal, and it is trending in the wrong direction. A 2010 report from the OECD noted that Australia’s underemployment rate has been consistently high by international comparison. The graph below illustrates the underemployment rate in Australia from 1978 to the present.

The high underemployment rate deserves attention for a range of compelling social and economic reasons.

On the individual level, research has found that underemployed workers are more likely to exhibit lower job satisfaction, higher job turnover, poorer mental and physical health and persistently lower income.

Furthermore, underemployed workers are overwhelmingly employed as casuals, with little job security and negligible superannuation accumulation. Banks are severely averse to extending credit to individuals lacking secure and sufficient income, which means underemployed individuals often find themselves trapped in rental accommodation with little chance of breaking into the housing market.

On the macroeconomic level, the underemployment rate has important implications for the level of underutilisation in the labour market. The ABS combines the unemployment rate and the underemployment rate to define the labour force underutilisation rate. Therefore, by focusing solely on unemployment, we cannot accurately assess whether or not we are efficiently utilising our available labour force.

Even with a low unemployment rate, we may be letting a large volume of hours, which workers are willing to put to use, go to waste. The following graph illustrates that the average employed person in Australia is working fewer and fewer hours.

Underemployment is not evenly dispersed across different demographics. For example, women are over-represented in the underemployment figures. The ABS data for August 2013 identified 964,300 underemployed workers, of which 566,800 (or 58.7%) were females. Overall, the rate for women was 9.8%, compared to 5.9% for men.

Another group hit hard by the growing trend is young people. In August 2013, the underemployment rate for people aged 15–24 was 14.8%, compared to an overall rate of 7.8%. To put that in historical context, in 1978 the youth underemployment rate was 3.0%, with an overall rate of 2.6%.

Aside from women and young people, other groups found to be at risk are immigrants, people with a lower educational attainment and individuals living in rural areas.

Furthermore, a highly significant factor was found to be labour market history. Research has established that workers who experienced underemployment in a previous period are considerably more likely to experience underemployment again. This path-dependency was equally true for males and females.

Since underemployment is best understood as people wanting to work more hours than they can currently attain, it represents a mismatch between the demand for, and supply of, hours of work. More specifically, it means there could either be an increasing trend in the amount of hours people want to work (demand), or a decreasing trend in the amount of hours available (supply).

The most plausible explanation is on the supply-side. The Australian economy has been going through a gradual shift in the composition of industries. Our manufacturing sector is shrinking while our services sector grows.

The services sector lends itself to casualisation much easier than the industrial sector, hence we have seen an effective doubling of the proportion of employees classified as part-time (<35 hours/week). The increased supply of part-time work relative to full-time work assists in explaining the reduction in the hours available to the typical worker represented above in Figure 2. The graph below illustrates the shift towards part-time employment.

An unsettling implication from the proliferation of part-time work and the demise of full-time work is in poverty statistics. A recent inquiry from the National Centre for Social and Economic Modelling posited that a person in a family in which the principal ‘bread-winner’ was employed part-time had a 17.0% chance of living in poverty, compared to a figure for full-time employment of 3.0%. Even more concerning is the fact that the former probability has grown from 11.4% in 2001.

The greater availability of part-time work also helps explain why women and young people are affected the most by underemployment. Both groups are much more likely to work part-time in labour-fluid service sectors such as retail and hospitality.

Moreover, an additional explanation for the startlingly high youth figure is that there is an increasing growth rate of tertiary educated young people, yet only a steady growth rate of full-time graduate jobs. Research has suggested this has led to many skilled young people drifting hopefully through casual job opportunities, rather than settle for a stable, lesser-skilled job with more hours.

This inference is complementary to a 2008 report from the Productivity Commission, which found that 36% of underemployed persons cited a lack of suitable job vacancies as the main barrier to sufficient employment.

As with a plethora of economic problems, any government intervention carries a high probability of unforeseen consequences. For example, incentives for firms to hire employees full-time could tempt higher unemployment. Unless there is growth in the aggregate supply of hours, increasing the supply available to a typical employee will simply muscle some out of employment.

The best avenue would therefore be to have the aggregate supply of hours grow at a rate superseding that of the total labour force. Such a dynamic would primarily be a product of population growth and the composition of economic growth, and is outside the scope of this article. Exactly how it would be accomplished is another matter entirely.

An important transition would be for discourse to revolve around how much people are working, and under what conditions, rather than to simply analyse the unemployment rate. Regardless of whether or not a silver-bullet solution for growing underemployment exists, an increasing number of people essentially expressing decreasing life satisfaction is an issue that deserves recognition and debate.