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What is full employment?
What’s important to know about it?
In this article, I will break down the meaning of Full Employment so you know all there is to know about it!
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Table of Contents
What Is Full Employment
In economic terms, full employment refers to a situation where the highest number of workers are employed.
In other words, all possible unskilled and skilled workers are employed at the highest possible rate in the economy.
It’s like a theoretical situation where unemployment is zero.
Full employment supposes that everyone in the economy that is able to work can find a job.
In reality, it’s impossible to achieve full employment in the most absolute sense of the word.
The government and economists use the full employment ideal to consider and implement various economic policies aimed at reducing the unemployment rate.
Keep reading as I will break down different types of full employment that economists use to define various economic policies.
Why Is Full Employment Important
Understanding full employment is important for economists and policymakers to make decisions steering the economy in the right direction.
Full employment is an ideal that can never be achieved in reality where everyone capable of working is employed.
However, this theoretical notion of full employment allows economists to determine the most optimal economic position it can achieve.
The idea is if everyone who is capable of working is employed, the economy will produce at its most optimal level.
On the other hand, if full employment is not achieved, then economists should assess what aspects of the economy will need to be improved to achieve greater economic efficiency.
To better understand full employment, let’s look at the different types of full employment.
Types of Full Employment
Economists have defined different types of full employment with the intention of implementing the proper economic policies allowing them to maximize the employment rate.
The first type of full employment is the natural rate of unemployment.
The natural rate of unemployment represents the expected rate of unemployment in a healthy and normally functioning economy.
At any point in time in the economy, you have people moving from one job to another, there may be technological advancements that affect the result in employment gains or losses, and where you have structural and frictional factors resulting in some unemployment.
The second type of full employment is the non-accelerating inflation rate of unemployment.
The non-accelerating inflation rate of unemployment (NAIRU) represents the unemployment rate that is expected when inflation is low and stable.
Economists consider that NAIRU is the most optimal rate of unemployment we can have in the economy without triggering an upward pressure on inflation.
With these two types of full employment models, we can implement policies aimed at achieving the most optimal employment rate in the economy.
Full Employment Impact
When the economy operates at its full employment potential, it means that all skilled and unskilled workers have a job.
Although this is great for employees, employers, businesses, and companies who need skilled and unskilled labor will have to compete to attract the talent they need to be successful.
The shortage of talent will result in a large-scale increase in wages and, consequently, a large-scale increase in the costs of goods and services offered by companies.
If full employment conditions persist long enough, it can be detrimental to the economy as it will trigger inflation that could spiral out of control.
Also, too much inflation will lead to the devaluation of currency leading to additional adverse consequences for the economy as a whole.
We saw this type of pressure on wages and labor shortages following the COVID-19 pandemic driving the unemployment rate down but inflation up.
In such circumstances, companies have to find ways to cut costs, automate, and find ways to produce more efficiently.
How Unemployment Affects Full Employment
To achieve full employment in the economy, policymakers look at factors leading to unemployment.
When you can understand what causes unemployment in the economy and how you can mitigate it, you can achieve a greater employment rate.
Let’s look at the different types of unemployment.
Structural unemployment is caused by technological advancements in society.
When companies implement software systems and automation, they will consequently reduce their workforce.
This results in structural unemployment in the economy.
Institutional unemployment is caused by governmental policies and programs that can affect employment rates in the economy.
For example, social equity programs require that companies hire employees in a certain way to be compliant with the law.
Companies that implement such practices must choose certain types of employees over others, leading to institutional unemployment.
Frictional unemployment results from the natural movement of workers in the economy.
Essentially, when employees leave one job to find another job, you end up with frictional unemployment in the economy.
At any point in time, there are people entering the labor market, individuals leaving, and others changing jobs.
Cyclical unemployment results from changes in economic cycles.
When the economy is growing, companies tend to hire more people and so unemployment rates go down.
When the economy is shrinking or when there’s a recession, companies reduce their workforce and so unemployment rates go up.
So there you have it folks!
What does full employment mean?
In a nutshell, full employment refers to the highest level of employment an economy can sustain without triggering an upward pressure on inflation.
This ideal suggests that anyone who is able to work and willing to work can find a job.
To determine full employment, economists and policymakers look at the unemployment rate to see how well the economy is attaining its full employment potential.
Another way of looking at full employment is to consider what is the optimal level of unemployment.
Since full employment can never be achieved, the closest that policymakers can hope to get is to the optimal unemployment rate.
Implementing economic policies is not easy as you generally have to favor one policy at the expense of others.
Now that you know what full employment means and why it’s important, good luck with your research!
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