FULL EMPLOYMENT

In macroeconomics, full employment is a condition of the national economy, where all or nearly
all persons willing and able to work at the prevailing wages and working conditions are able to do
so. It is defined either as 0% unemployment, literally, no unemployment (the rate of
unemployment is the fraction of the work force unable to find work), as by James Tobin, or as the
level of employment rates when there is no cyclical unemployment. It is defined by the majority
of mainstream economists as being an acceptable level of natural unemployment above 0%, the
discrepancy from 0% being due to non-cyclical types of unemployment. Unemployment above
0% is advocated as necessary to control inflation, which has brought about the concept of the
Non-Accelerating Inflation Rate of Unemployment (NAIRU); the majority of mainstream
economists mean NAIRU when speaking of "full" employment.

Diagram of macroeconomic circulation. LS ≤ LD is

the full employment situation, one in which the rate
of unemployment is zero or negative (corresponding
to a labor shortfall).

ECONOMIC CONCEPT

What most neoclassical economists mean by "full" employment is a rate somewhat less than
100% employment, considering slightly lower levels desirable, others, such as James Tobin,
vehemently disagree, considering full employment as 0% unemployment:

“As a young professor I did a paper where I analyzed the optimal unemployment rate,”
said Joseph Stieglitz, a professor at Columbia University in New York, who knew Tobin
at Yale. “Tobin went livid over the idea. To him the optimal unemployment rate was
zero.”
Rates of unemployment substantially above 0% have also been attacked by John Maynard
Keynes:

"The Conservative belief that there is some law of nature which prevents men from being
employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a
tenth of the population in idleness for an indefinite period, is crazily improbable – the
sort of thing which no man could believe who had not had his head fuddled with
nonsense for years and years. The objections which are raised are mostly not the
objections of experience or of practical men. They are based on highly abstract theories –
venerable, academic inventions, half misunderstood by those who are applying them
today, and based on assumptions which are contrary to the facts…Our main task,
therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and
what seems nonsense is nonsense."
– J.M. Keynes in a pamphlet to support Lloyd George in the 1929 election.

20th century British economist William Beveridge stated that an unemployment rate of 3% was
full employment. Other economists have provided estimates between 2% and 7%, depending on
the country, time period, and the various economists' political biases.

Before Friedman and Phelps, Abba Lerner developed a version of the NAIRU. Unlike the current
view, he saw a range of "full employment" unemployment rates. He distinguished between "high"
full employment (the lowest sustainable unemployment under incomes policies) and "low" full
employment (the lowest sustainable unemployment rate without these policies).

TECHNICAL TERMS

1- IDEAL UNEMPLOYMENT

An alternative, more normative, definition (used by some labor economists) would see "full
employment" as the attainment of the ideal unemployment rate, where the types of
unemployment that reflect labor-market inefficiency (such as structural unemployment) do not
exist. Only some frictional unemployment would exist, where workers are temporarily searching
for new jobs. For example, Lord William Beveridge defined "full employment" as where the
number of unemployed workers equaled the number of job vacancies available. He preferred that
the economy be kept above that full employment level in order to allow maximum economic
production.
2- LONG RUN AGGREGATE SUPPLY

The concept of full employment has so far been used in conjunction with the long run aggregate
supply (LRAS) curve, where long run potential output is also the full employment level of output.
Full employment does not mean that there is 'zero unemployment', but rather that all of the people
willing and able to work have jobs at the current wage rate. Full employment is the quantity of
labor employed when the labor market is in equilibrium.

3- NAIRU

The following should be understood in discussions of NAIRU: Governments that follow it are
attempting to keep unemployment at certain levels (usually over four percent, and as high as ten
or more percent) by keeping interest rates high. As interest rates increase, more bankruptcies of
individuals and businesses occur, meaning less money to hire staff or purchase goods (the making
and distributing of which requires workers, which means jobs). It might also be noted that the
main cause of inflation is not high employment, but rather the ability of banks to make money
with little to no backing with things of value (commodities such as gold and silver are some
examples), thus flooding the market with money and decreasing the value of each dollar already
issued in the process, assuming the economy has not kept up to this increase in issued loans.
Economists such as Milton Friedman and Dr. Ravi Batra have theorized ways that a modern
economy could have low inflation and near full employment (as in close to 100% of those who
are not students and are healthy enough to work, and who wish to work at any given point in
time), as of yet these have yet to be widely disseminated through the press or introduced by most
governments. Paul Martin - former finance minister and past Prime Minister of Canada - once
held that full employment could be achieved, yet let go of this idea after gaining power. For more
on this see the expose "Shooting the Hippo" by Linda McQuaig, author and former columnist for
many of Canada's top newspapers.

Friedman's view has prevailed so that in much of modern macroeconomics, full employment
means the lowest level of unemployment that can be sustained given the structure of the
economy. Using the terminology first introduced by James Tobin (following the lead of Franco
Modigliani), this equals the Non-Accelerating Inflation Rate of Unemployment (NAIRU) when
the real gross domestic product equals potential output. This concept is identical to the "natural"
rate but reflects the fact that there is nothing "natural" about an economy.

At this level of unemployment, there is no unemployment above the level of the NAIRU. That is,
at full employment there is no cyclical or deficient-demand unemployment. If the unemployment
rate stays below this "natural" or "inflation threshold" level for several years, it is posited that
inflation will accelerate, i.e. get worse and worse (in the absence of wage and price controls).
Similarly, inflation will get better (decelerate) if unemployment rates exceed the NAIRU for a
long time. The theory says that inflation does not rise or fall when the unemployment equals the
"natural" rate. This is where the term NAIRU is derived.

The level of the NAIRU thus depends on the degree of "supply side" unemployment, i.e.,
joblessness that can't be abolished by high demand. This includes frictional, structural, and
classical unemployment.

3- PHILLIPS CURVE

Ideas associated with the Phillips curve questioned the possibility and value of full employment
in a society: this theory suggests that full employment—especially as defined normatively—will
be associated with positive inflation. The Phillips curve tells us also that there is no single
unemployment number that one can single out as the "full employment" rate. Instead, there is a
trade-off between unemployment and inflation: a government might choose to attain a lower
unemployment rate but would pay for it with higher inflation rates. In 1968, Milton Friedman,
leader of the monetarist school of economics, and Edmund Phelps posited a unique full
employment rate of unemployment, what they called the "natural" rate of unemployment. But this
is seen not as a normative choice as much as something we are stuck with, even if it is unknown.
Rather than trying to attain full employment, Friedman argues that policy-makers should try to
keep prices stable (a low or even a zero inflation rate). If this policy is sustained, he suggests that
the economy will gravitate to the "natural" rate of unemployment automatically.

4- STRUCTURAL UNEMPLOYMENT

Some Economists estimate a "range" of possible unemployment rates. For example, in 1999, in
the United States, the Organization 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
"structural" unemployment rate, (the unemployment when there is full employment), plus &
minus, the standard error of the estimate.

5- FULL EMPLOYABILITY

Full employability indicates an attempt by government to make people "employable" by

both positive means (e.g. training courses) and negative means (e.g. cuts in benefits). It
does not necessarily create full employment.
 TECHNICAL ISSUES

Whatever the definition of full employment, it is difficult to discover exactly what unemployment
rate it corresponds to. In the United States, for example, the economy saw stable inflation despite
low unemployment during the late 1990s, contradicting most economists' estimates of the
NAIRU.

The idea that the full-employment unemployment rate (NAIRU) is not a unique number has been
seen in recent empirical research. Staiger, Stock, and Watson found that the range of possible
values of the NAIRU (from 4.3 to 7.3% unemployment) was too large to be useful to
macroeconomic policy-makers. Robert Eisner suggested that for 1956-95 there was a zone from
about 5% to about 10% unemployment between the low-unemployment realm of accelerating
inflation and the high-unemployment realm of disinflation. In between, he found that inflation
falls with falling unemployment.

Worse, the NAIRU doesn't stay the same over time—and can change due to economic policy. For
example, some economists argue that British Prime Minister Margaret Thatcher's anti-inflation
policies using persistently high unemployment led to higher structural unemployment and a
higher NAIRU.

POLICY

The active pursuit of national full employment through interventionist government policies is
associated with Keynesian economics and marked the postwar agenda of many Western nations,
until the stagflation of the 1970s.

AUSTRALIA

Australia was the first country in the world in which full employment in a free society was made
official policy by its government. On May 30, 1945, The Australian Labor Party Prime Minister
John Curtin and his Employment Minister John Dedman proposed a white paper in the Australian
House of Representatives titled Full Employment In Australia, the first time any government
apart from totalitarian regimes had unequivocally committed itself to providing work for any
person who was willing and able to work. Conditions of full employment lasted in Australia from
1941 to 1975. This had been preceded by the Harvester Judgment (1907), establishing the basic
wage (a living wage); while this earlier case was overturned, it remained influential.

JOB GUARANTEE

Some, particularly Post-Keynesian economists have suggested ensuring full employment via a
job guarantee program, where those who are unable to find work in the private sector are
employed by the government, the stock of thus employed public sector workers fulfilling the
same function as the unemployed do in controlling inflation, without the human costs of
unemployment.

KEYNESIAN FULL EMLOYMENT THEORY

Full Employment Equilibrium

An important bit of analysis undertaken using the Keynesian model is the relation between
equilibrium and full employment. Should equilibrium aggregate production not match the level of
aggregate production generated at full employment, two gaps can arise--recessionary gap and
inflationary gap.

While we know the equilibrium level of aggregate production from the Keynesian cross analysis,
we also need to know the full-employment level of aggregate production. The relation between
the two indicates which of the gaps, if either, might exist.

Full employment results with $15 trillion of aggregate production, which is greater than the $12
trillion equilibrium level of aggregate production.

The relation between equilibrium and full-employment aggregate production means the economy
has a recessionary gap. The resulting recessionary gap is $3 trillion of aggregate production. In
other words, aggregate production needs to increase by $3 trillion to eliminate this gap.This is
termed a recessionary gap because it arises during a business-cycle contraction or recession in
which unemployment is the more pressing problem facing the macro economy.

Note that this analysis indicates that the $12 trillion equilibrium can be at a level of aggregate
production that is less than full employment. And because $12 trillion is Equilibrium it persists
once reached. There is no mechanism within the Keynesian model that automatically moves
aggregate production to the full employment level.

As such, an outside force must intervene to achieve full employment. The recommended
Keynesian remedy is stabilization policies, especially fiscal policy. In particular, a recessionary
gap is closed through the use of expansionary fiscal policy.

EXPANSIONARY FISCAL POLICY

Expansionary fiscal policy is an increase in government spending and/or a decrease in taxes
designed to avoid or correct the problems associated with a business-cycle contraction.

Either action causes an increase or upward shift of the aggregate expenditures line. If the correct
vertical shift is achieved, then the Keynesian model can achieve equilibrium at the $15 trillion
full-employment level of aggregate production. Such a result would close the recessionary gap,
eliminate the business-cycle contraction, and reduce the level of unemployment.

FULL EMPLOYMENT EFFECT ON ECONOMIC GROWTH

Growth theorists since WORLD WAR II have gone further, arguing that it is not enough simply
to achieve full employment periodically. Some maintain that it is necessary to maintain full
employment over an extended period of time if high growth is to result. This argument relates to
the earlier point that two economies may experience the same rate of growth of capital but that
overall growth.

FULL EMPLOYMENT IS AFFECTED BY

1-GOVERNMENT FINANCE

In his General Theory of Employment, Interest and Money (1935–36) KEYNES

endeavored to show that a capitalist economy with its decentralized market
system does not automatically generate full employment and stable prices and that
government should pursue deliberate stabilization policies. There has been much
controversy among economists over the substance and meaning of Keynes.

2- GOVERNMENT POLICY

Trends in unemployment and statistical differences among groups in the

populations are studied for what they may reveal of general economic trends and
as bases for possible governmental action. Full employment has been a stated goal
of many governments since World War II, and a variety of programs have been
devised to attain it.

FULL EMPLOYMENT ROLE IN

1- ECONOMIC FORECASTING
 Long-range forecasts usually are based on the assumption that activity toward the end of
the period will reflect normal “full” employment. Given this assumption, the overall rate
of growth depends on two principal factors: the number of people in the labor force and
the rate at which productivity (output per worker) increases.

2- INCOME THOERY

The first example is one in which business firms see increased opportunities for
profitable investment. The system is already at full employment, and hence an increase in
spending on investment without a corresponding decrease in spending for consumption
would spell inflation.

The American Institute for Full Employment is a non-profit, public policy research and
development center founded in 1994.

MISSION

The Institute was founded with the goal of Full Employment – universal access to jobs with
career potential for all who can work, so they can avoid the many poverties of unemployment.
The Institute currently researches and develops effective public assistance, employment, and
retirement policies.

INSTITUTE WORK

The Institute conducts leading research, studies best practices, and develops practical solutions in
the areas of unemployment insurance, workforce development, retirement income, and public
assistance. The Institute assists states with policy and program design and implementation. The
Institute also publishes opportunity reports that provide a vital source of information for state and
local officials who want to know how their workforce and public assistance programs compare to
those in other areas and what they can do to improve.