In Keynesian economics, underemployment equilibrium is a situation with a persistent shortfall relative to full employment and potential output so that unemployment is higher than at the NAIRU or the "natural" rate of unemployment.
[3] Exogenous forces such as fiscal policy have to be implemented in order to drive the economy to a better state.
such that [4] Given a well-defined economy[2][4], there could be many stable equilibrium states – some are more desirable than others from a social welfare point of view.
When the labor force are overeducated for the skill level of available employment opportunities in the economy, an underemployment equilibrium will occur.
“Oversupply” here refers to an excess in both labor quantity and quality.
Overqualification is the most common form of underemployment equilibrium and is a direct result of oversupply.
It defines the situation when individuals work in professions which require less education, skill, experience or ability than they possess.
In economic terms, these agents are producing less than their socially optimal output.
Collectively, when a lot of individuals produce below their full potential, the economy is in a sub-optimal underemployment equilibrium.
[5] Overstaffing refers to the state when firms or other organizations that act as employers in an economy are hiring more people than they need.
This redundancy invalidates unemployment rates as a signal for the existence of underemployment equilibrium.
When firms are overstaffed, they can not achieve their maximum profit levels, which leads to undesirable social consequences such as low GDP growth.
On the one hand, many outside forces (including financial instability, hyper-inflation, lack of capital, etc.)
On the other hand, the first two decades of the 20th century saw rapid advancement in production technologies, which effectively eliminated a large number of skilled jobs.
Both of the above forces help create an insufficient demand of labor market during that time, causing an underemployment equilibrium.
This particular underemployment equilibrium takes form of overqualification, characterized by high unemployment rate and low household incomes.
Graduates entering the job market in 2012 faced very tough competitions[8], caused by an oversupply of skilled workers, including fresh graduates and people who were laid off during the 2008 financial crisis.
This underemployment equilibrium state is characterized by overqualification – many college graduates are taking positions designed for less educated individuals due to gloomy job market conditions.
[8] The Bureau of Labor Statistics calculates monthly the “Underemployment Rate” starting from January, 1948.
The underemployment rate has a cyclical trend and is generally higher during recession periods.
General Equilibrium, Overlapping Generations Models, and Optimal Growth Theory.
Erdogan, B., & Bauer, T. N.. “Perceived overqualification and its outcomes: The moderating role of empowerment”.
Frank, Robert H.; Bernanke, Ben S. Principles of Macroeconomics (3rd ed.).
“The Class of 2012, Labor market for young graduates remains grim”.