Disguised unemployment is a situation where a portion of the labor force is either left without work or is working in a redundant manner such that worker productivity is essentially zero. It is a type of unemployment where individuals appear to be employed, but they are forced to work under their ability, leading to underutilization of skills and less pay. Disguised unemployment can refer to any segment of the population not employed at full capacity, but it is often not counted in official unemployment statistics within the national economy.

Disguised unemployment is challenging to identify, but it can be characterized by the following:

• People working jobs beneath their skill set
• Unutilized workers who are ill or disabled but still able to be productive
• Job seekers who are demoralized by their inability to find work and so stop looking for it

An example of disguised unemployment is when a piece of land requires only three people to work on it, but instead, five people are working on it. In this case, the two extra people are said to be in a situation of disguised unemployment. Another example is when painters, plumbers, and electricians are unable to find work on a daily basis and work way less than their potential. Disguised unemployment is very common in third-world countries, which are still developing and have large populations.