Full employment
Full employment is an economic situation in which there is no cyclical or deficient-demand unemployment.[1] Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. For instance, workers who are "between jobs" for short periods of time as they search for better employment are not counted against full employment, as such unemployment is frictional rather than cyclical. An economy with full employment might also have unemployment or underemployment where part-time workers cannot find jobs appropriate to their skill level,[2] as such unemployment is considered structural rather than cyclical. Full employment marks the point past which expansionary fiscal and/or monetary policy cannot reduce unemployment any further without causing inflation.
Some economists define full employment somewhat differently, as the unemployment rate at which inflation does not continuously increase. Advocacy of avoiding accelerating inflation is based on a theory centered on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) and those who hold it usually mean NAIRU when speaking of full employment.[3][4] The NAIRU has also been described by Milton Friedman, among others, as the "natural" rate of unemployment. Such views tend to emphasize sustainability, noting that a government cannot sustain unemployment rates below the NAIRU forever: inflation will continue to grow so long as unemployment lies below the NAIRU.
For the United States, economist William T. Dickens found that full-employment unemployment rate varied a lot over time but equaled about 5.5 percent of the civilian labor force during the 2000s.[5] Recently, economists have emphasized the idea that full employment represents a "range" of possible unemployment rates. For example, in 1999, in the United States, the Organisation for Economic Co-operation and Development (OECD) gives an estimate of the "full-employment unemployment rate" of 4 to 6.4%. This is the estimated unemployment rate at full employment, plus or minus the standard error of the estimate.[6]
The concept of full employment of labor corresponds to the concept of potential output or potential real GDP and the long run aggregate supply (LRAS) curve. In neoclassical macroeconomics, the highest sustainable level of aggregate real GDP or "potential" is seen as corresponding to a vertical LRAS curve: any increase in the demand for real GDP can only lead to rising prices in the long run, while any increase in output is temporary.
Historical measurement and discussion[edit]
For the United Kingdom, the OECD estimated the NAIRU (or structural unemployment) rate as being equal to 8.5% on average between 1988 and 1997, 5.9% between 1998 and 2007, 6.2%, 6.6%, and 6.7 in 2008, 2009, and 2010, then staying at 6.9% in 2011–2013. For the United States, they estimate it as being 5.8% on average between 1988 and 1997, 5.5% between 1998 and 2007, 5.8% in 2008, 6.0% in 2009, and then staying at 6.1% from 2010 to 2013. They also estimate the NAIRU for other countries.[11] These calculations have been criticised as lacking any foundation in evidence.[12]
The era after the 2007-2009 Great Recession shows the relevance of this concept, for example as seen in the United States. On the one hand, in 2013 Keynesian economists such as Paul Krugman of Princeton University see unemployment rates as too high relative to full employment and the NAIRU and thus favor increasing the aggregate demand for goods and services and thus labor in order to reduce unemployment. On the other hand, pointing to shortages of some skilled workers, some businesspeople and Classical economists suggest that the U.S. economy is already at full employment, so that any demand stimulus will lead to nothing but rising inflation rates. One example was Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank, who has since changed his mind.[13]