Full Employment

What Is Full Employment?

Full employment is an economic situation in which all available labor resources are being used in the most efficient way possible. Full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time.

True full employment is an ideal — and probably unachievable — situation in which anyone who is willing and able to work can find a job, and unemployment is zero. It is a theoretical goal for economic policymakers to aim for rather than an actually observed state of the economy. In practical terms, economists can define various levels of full employment that are associated with low but non-zero rates of unemployment.

Understanding Full Employment

Full employment is seen as the ideal employment rate within an economy at which no workers are involuntarily unemployed. Full employment of labor is one component of an economy that is operating at its full productive potential and producing at a point along its production possibilities frontier. If there is any unemployment, then the economy is not producing at full potential, and some improvement in economic efficiency may be possible. However, because it may not be practically possible to eliminate all unemployment from all sources, full employment may not actually be attainable.

Types of Unemployment

Unemployment can result from cyclical, structural, frictional, or institutional causes. Policymakers can focus on reducing the underlying causes of each of these types of unemployment, but in doing so they may face trade-offs against other policy goals.

Structural

The desire to encourage technological progress can cause structural unemployment. For example, when workers find themselves obsolete due to the automation of factories or the use of artificial intelligence.

Institutional

Institutional unemployment arises from institutional policies that affect the economy. These can include governmental programs promoting social equity and offering generous safety net benefits, and labor market phenomena, such as unionization and discriminatory hiring.

Frictional

Some unemployment may be unavoidable by policymakers entirely, such as frictional unemployment, which is caused by workers voluntarily changing jobs or first entering the workforce. Searching for a new job, recruiting new employees, and matching the right worker to the right job are all a part of it.

Cyclical

Cyclical unemployment is the fluctuating type of unemployment that rises and falls within the normal course of the business cycle. This unemployment rises when an economy is in a recession and falls when an economy is growing. Therefore, for an economy to be at full employment, it cannot be in a recession that’s causing cyclical unemployment.

For the most part, macroeconomic policymakers focus on reducing cyclical unemployment to move the economy toward full employment, but in this case they may face trade-offs against rising inflation or the risk of distorting other sectors of the economy.

Cyclical unemployment, which is driven by changes in economic cycles, should not be confused with "seasonal unemployment," where there are changes in the workforce that predictably occur throughout the year, For example, jobs in the retail sector typically decrease after the traditional run-up to the holiday shopping season ends after New Year's. Unemployment rises when people hired for the holidays are no longer needed to meet demand.

The Phillips curve posits that full employment inevitably results in higher inflation, which in turn leads to increasing unemployment.

The Phillips Curve

In terms of cyclical unemployment, many macroeconomic theories present full employment as a goal that, once attained, often results in an inflationary period. The link between inflation and unemployment is a prominent part of the Monetarist and Keynesian theories. This inflation is a result of workers having more disposable income, which would drive prices upward, according to the concept of the Phillips curve.

This poses a potential problem for economic policymakers, such as the U.S. Federal Reserve, that have a dual mandate to achieve and maintain both stable prices and full employment. If there is, in fact, a trade-off between employment and inflation, per the Phillips curve, then simultaneous full employment and price stability may not be possible.

The Austrian School

On the other hand, some economists also argue against the overzealous pursuit of full employment, especially via over-expansion of money and credit through monetary policy. Economists of the Austrian School believe that this will result in damaging distortions to the financial and manufacturing sectors of the economy. This might even result in more unemployment in the long run by precipitating a subsequent recession as real resource constraints come into conflict with artificially increased demand for various types of capital goods and complementary labor.

Types of Full Employment

Due to the difficulty, and questionable desirability, of achieving true full employment, economists have developed other, more pragmatic goals for economic policy.

First, the natural rate of unemployment represents only the amount of unemployment due to structural and frictional factors in labor markets. The natural rate serves as an achievable approximation of full employment while accepting that technological change and the normal transaction costs of labor markets will always mean some modest unemployment at any given point in time.

Second, the non-accelerating inflation rate of unemployment (NAIRU) represents the rate of unemployment that is consistent with a low, stable rate of price inflation. The NAIRU is useful as a policy target for economic policymakers who operate under a dual mandate to balance full employment and stable prices. It is not full employment, but it is the closest the economy can be to full employment without excessive upward pressure on prices from increasing wages. Note that the NAIRU only makes sense conceptually and as a policy target if and when there is indeed a stable trade-off between unemployment and inflation (the Phillips curve).