Disguised unemployment (also called hidden unemployment) is a situation where more people are employed in a job than are actually needed, so some workers contribute little or nothing to total output. Even though they appear “employed” on paper, if a few of them stopped working, production would remain the same, which means their marginal productivity is almost zero.

In simple terms:

It is unemployment hidden inside employment — people seem to be working, but the economy would not really miss their work.

A classic example is a small family farm where 7 family members work on land that actually needs only 3 workers; if 4 family members move to another job, farm output hardly changes. This type of disguised unemployment is common in agriculture and informal sectors of many developing countries, where there is surplus labour and limited productive opportunities.