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Full Employment: Definition, Types, And Why Is It Difficult To Measure?
Last Updated on: September 20th, 2024
Full employment is an economic situation where the economy makes use of all the labor resources in an efficient manner. In theory, full employment is an ideal situation and practically unachievable. It is a situation when the rate of unemployment is zero. In this case, an individual who is willing to work can find a job easily.
In this article, you will get a general idea of what is considered full employment. Apart from that, we will also discuss the conditions of the occurrence of full employment and its major causes. In addition to that, we shall also share with you a simple example of such a situation in the economy. Finally, you will learn what are the major benefits of full employment for the economy as a whole.
What Is Full Employment? – Full Employment Meaning
According to Investopedia,
?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.?
If you look at it from a practical point of view, the major economists and policymakers of the world define different types of full unemployment, which mainly resembles low rates of unemployment, which is, of course, not zero.
Full employment is a situation when the economy makes full use of all the available labor resources in the most efficient manner. However, the definition of full employment changes with what different economists look at it. They base their definitions on their theories which they set targets as per their economic policies.
Although targeting full employment is a good thing for economists, some economists still feel that some form of unemployment is necessary. This will help the economy to avoid inflation, as unemployment creates a lack of money among people. With a lack of money among individuals, there will be less demand for consumables. Hence, lesser demands will limit higher prices and thereby will limit inflation.
Hence, in many cases, economists do not go for full employment and consider an unemployment level of 5% or lower in the economy as a good thing. They consider this percentage as a showcase of full employment.
Full Employment – How Does The Theory Help Economists?
Many economists agree that there is a requirement for a newer understanding of full employment. Thereby, economists feel that some amount of unemployment is necessary to counter rising inflation when almost everyone has a job.
According to Wall Street Mojo,
?A high employment rate sure has benefits. But an economist would point out the downside to full employment for the rest of the employed population ? inflation. When everyone has a job, they are well-to-do and can afford goods and services. However, this would push up the demand and then the prices.?
Hence, economists recommend policies that there is an allowance for workers to move between job opportunities, pursue their education, upskill themselves for better jobs, and more.
However, this is not a justification for not achieving zero unemployment. If the economy needs to be efficient, it is important for all citizens to prosper and all citizens to work effectively. Hence, there is a huge role for the government to play here.
An Example Of Full Employment
Economists define full employment as a situation in the economy where the rate of unemployment is equal to or below NAIRU (non-accelerating inflation rate of unemployment). Economists base the estimates of the measure on the historical relationship between rates of unemployment and the differences in the rate of inflation. A number is agreed upon here.
If the rate of unemployment is equal to or below this number, then economists consider it a situation of full employment. In such situations, despite the demand for workers, businesses do not find them, and wages, as well as inflation, rise. On the other hand, if there are too many workers who need jobs, then inflation remains low, as the prices of things are low.
According to TheConversation.com,
?At the moment, the Congressional Budget Office puts NAIRU at 4.6 percent, a little above the 3.9 percent unemployment rate. That means the U.S. is at full employment ? and that wages should be going up. But until recently, they haven?t gained much, which has puzzled many economists.?
The US Federal Reserve also considers the full employment rate as one of the key mandates at the time of the sale of interest rates. When unemployment is high, the central bank considers lowering its rates, and when the full employment rate is achieved and wages go up, the central bank lowers its rates. This helps in stabilizing the rate of inflation.
What Are The Major Benefits Associated With Full Employment?
The following are some of the major benefits that full employment can provide at the practical level:
- There shall be reduced poverty, as most people will have access to work, and hence better livelihood.
- There will be better wages for workers and better working conditions as employers are competing for workers.
- Workers cannot lose their skills and cannot get demotivated due to unemployment.
- Since people in the economy have jobs, they are able to afford goods and services. This helps in improving GDP growth.
- The government will have to spend less on unemployment benefits and welfare programs. Furthermore, governments will also borrow less since there are higher revenues from income taxes.
Bottom Line
You can see from this article that full employment is a type of ideal economic situation where an individual looking for a job gets a job, and there is no unemployment in the economy. Although every economy desires such a situation, it is practically unattainable since all the economic units must work at their full capability, with 100% efficiency.
Despite this situation being impossible to attain, this must always be the goal of economies. This is because it will not only contribute to economic growth and development but will also increase people?s living standards. How do you think efficiency can be achieved with full employment? Share your thoughts about the matter with us in the comments section below.
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