What is Underemployment Equilibrium?
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Underemployment equilibrium, also referred to as under-employment equilibrium or below full employment equilibrium, is a condition where employment in an economy persists below full employment and the economy has entered an equilibrium state that sustains a rate of unemployment above what is considered desirable. In this state the unemployment rate remains consistently above the natural rate of unemployment or non-accelerating inflation rate of unemployment (NAIRU) because aggregate supply and aggregate demand are in balance at a point below full potential output. An economy that settles into an underemployment equilibrium is how 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 under the level of full employment. Underemployment itself is a distinct term that refers to employed workers who are working fewer hours than they would like or in jobs that require lower skills (and often come with lower pay) than their education level and experience would indicate. Underemployment may be included as one component of the general unemployment rate, but is otherwise unrelated to the concept of an underemployment equilibrium, though these two uses are often mistakenly conflated by those unfamiliar with economics.
