In the world of employment data, unemployment statistics get a lot of attention. They have a huge impact on the economy as a whole and they also affect several other areas. Although a certain percentage of unemployment is the norm in every economy in the world, economic theory has a concept known as full employment. What exactly is full employment and why is it significant to economists?

Full Employment= Job Eutopia

Full employment is a theoretical scenario that occurs when the entire labor force is being used in the most efficient way possible. All of the skilled labor has a job in the field that they want to be in and all of the unskilled labor has a satisfactory job as well. It is possible for an economy to have full employment, although it’s not very easy to pull off.

See Labor Immobility and the Labor Participation Rate for some limiting factors in the pursuit of full employment.

Frictional Unemployment

Although the term “full employment” sounds like everyone is working, that isn’t necessarily the case. Even during times of full employment, there are still some workers who are not working. Most of these people are considered to be in frictional unemployment. What exactly is frictional unemployment? Frictional unemployment is a term that is used to describe those who are in between jobs, but are still in the workplace. For example, if you are working in a job, and you determine that you don’t like your employer, you might decide to quit and look for a new job. During the time period where you are looking for new employment, you are considered to be in frictional unemployment.

There are also certain groups of people who don’t have to be employed in order for a society to be at full employment. For example, those who are old enough to be retired or are minors, don’t have to be working. Disabled individuals and those who are unable to work for some other reason also would not fall into this category. In a period of full employment, some economists believe that there would still be somewhere between two and seven percent of the workforce out of work due to frictional unemployment.

Inflation

One of the main government tools used to induce full employment in the economy is the use of monetary stimulus. This increase in the money supply creates artificial demand because people think they are richer than they would otherwise have been and thus they spend money they would not otherwise have spent. Thus “goosing” the economy and causing companies to produce more and thus hire more workers. In the short run this has the desired effect. But in the longer run inflation results and people realize they aren’t as rich as they thought they were and that they spent some of their wealth foolishly (on things they wouldn’t have had they understood that even though they have more dollars they are no richer.) Once the true situation is understood, the people cut back on spending further than they would have and the extra employees end up losing their jobs plus additional employees are laid off because people have to pay off thier foolish expenditures. So the end result is worse off than before the stimulus. See Full Employment, Planning and Inflation by F.A. Hayek

Hayek believes that,

The habit of inflation has often been compared to the addiction to a stimulating drug. But the position of a society which has become addicted to the drug of inflation is even worse than that of an individual in the corresponding case.

Compared to Job Openings

While there are some discrepancies involving the official definition of full employment, one method aims to compare it to the number of job openings that are available. For example, if the number of unemployed people in the economy are equal to the number of job openings that are available, then full employment is said to have been reached. The people who are currently unemployed are simply part of the frictional unemployment number, as they could have a job if they applied for it and were hired.

Examples of Full Employment

Australia is known as the first country to set full employment as a policy goal. They started this policy back in 1945, and it lasted through 1975.

The United States also has a policy of striving for full employment, although it has been struggling to do so recently. The goal is to keep unemployment down to less than 3 percent of individuals who are able to work, over the age of 20. The United States government actually has the power to create a reservoir of jobs for people who are unemployed, so as to achieve full employment. However, this power has never fully been used as the reservoir of jobs has never been created.

Considerations

Overall, the idea behind full employment is definitely a good goal to strive for in any society. However, in reality it is very difficult to achieve. A lot of different variables have to be just right in order to get the employment numbers headed in the right direction. If the government gets too involved, it can often negatively affect the employment rate and keep people from being able to get a job that they really want. Governments continue to try to find ways to create more jobs and get closer to full employment.

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Image Credit: Some rights reserved by Victor1558

Author: Chris Keenan