Underemployment is generally conceived as excess labour supply associated with employed
persons – that is, as a situation where employed persons would like to work more hours at
prevailing wage rates. Using information collected by the 2001 Household, Income and Labour
Dynamics in Australia (HILDA) survey, this study seeks to investigate the extent of
underemployment and its effects on outcomes such as income, welfare dependence and
subjective well-being. It is found that over one in six employed persons is underemployed,
corresponding to a failure to utilise 5 per cent of hours supplied by employed persons.
Underemployment is more frequently associated with part-time employment for females, but for
males is more frequently associated with full-time employment. Models estimated of the effects
of underemployment on outcomes imply that, while unemployment clearly has greater adverse
consequences, underemployment is nonetheless associated with significant detrimental effects on
the outcomes examined. Negative effects are found for both part-time employed and full-time
employed workers who would prefer to work more hours, but effects are greater for
underemployed part-time workers, and are particularly large for part-time workers who would
like to work full-time. Indeed, for part-time workers seeking full-time employment, effects
attributable to underemployment are, for some outcomes, not far short of those attributable to
unemployment.