What are the implications of underemployment in the Australian context?

What is underemployment? How is it costing us? What can we do about it?

Underemployment refers to a mismatch between an individual’s hours of work and preferred hours of work. It can be considered as an excess supply of the labour force within employed workers, meaning the economy is working below its capacity (Wilkins, 2007).

Underemployment in Australia has steadily increased since the early 2000s, which can be partly attributed to the structural shift in the economy towards more casual and part time employment (Dow Jones, 2019; RBA, 2021). Currently, underemployment increased to 8.3% in the July period (ABS, 2021). As seen in the graph below, underemployment has spiked amidst the current lockdown pandemic in June and July of 2021 as well as in mid-early 2020.

Retrieved from RBA Jul 2021

Underemployment has many economic and social costs. It is associated with negative job satisfaction, which may lead to inefficiencies in the labour market in the form of absenteeism, attrition, and overall decreased productivity (Kler et al, 2018; Penn State, 2018). The underutilisation of labour can also lead to wage stagnation as employers bid up working hours rather than wages. Low wage growth in Australia is reflected in slowed growth in household incomes (Parliament, 2019). Lower income growth may damper consumption and reduce economic growth prospects in the near future (Masters et al, 2021). Additionally, as Australia is a relatively smaller economy with a population of 25.36 million and a high savings rate (12.2%), the reduced investment from wage stagnation may further slow domestic economic growth (ABS, 2021).

To address this, the government and the RBA should consider both the cyclical and structural factors concerning underemployment. The two recent spikes in underemployment have been largely attributed to the pandemic, which may be considered an external temporary shock in the longer term (20-30 years). The government’s introduction of the Covid-19 disaster payments may help alleviate the stress of underemployment in the short term by providing lump sum payments to those who lost hours of work due to the current lockdown.

This is particularly of relevance as the sectors with higher underemployment and higher part-time work were some of the hardest hit by the current pandemic including Accommodation and Food Service, Arts and Recreation services, and Retail Trade (RBA, 2021). In the long run, the government’s 2021-2022 Budget has allocated new programs including the JobTrainer Fund and Boosting Apprenticeships Program to align the skills of the labour force with current job demands (Budget, 2021). The Budget also includes tax incentives for small to medium businesses to increase investment and growth, so as to incentivise higher labour demand and job opportunities that may see those that are underemployed obtaining higher career prospects (Budget, 2021).

All in all, underemployment is a challenging but real issue that the Australian labour force faces. Initiatives have been developed to improve the current underemployment rate however the long-term effects are yet to be seen. The current pandemic has exacerbated and highlighted the spare capacity in Australia’s economy, and has reminded policy makers that structural changes need to be addressed in order to satisfy a highly evolving open gig-economy.

By Catalina Dowd - 2nd Year Bachelor of Economics and Bachelor of Advanced Studies (Economics & Management)