Definition of Full Employment

Readers Question: explain how economists define ‘full employment’?

The first definition of full employment would be the situation where everyone willing to work at the going wage rate is able to get a job.

This would imply that unemployment is zero because if you are not willing to work then you should not be counted as unemployed. To be classified as unemployed you would need to be actively seeking work. This does not mean everyone of working age is in employment. Some adults may leave the labour force, for example, women looking after children.

Optimal Unemployment Level

Another definition of full employment would be the ‘optimal’ level of unemployment. In practise, an economy will never have zero unemployment because there is inevitably some frictional unemployment. This is the unemployment where people take time to find the best job for them. Frictional unemployment is not necessarily a bad thing. It is better people take time to find a job suitable for their skill level, rather than get the first job that comes along.

Full Employment and Full Capacity.

Another way to think of full employment is when the economy is operating at an Output level considered to be at full capacity. i.e. it is not possible to increase real output because all resources are full utilised. This would be a point on a Production possibility frontier. It can also be shown by AD/AS diagram.

Diagram of Full Employment

In this diagram full employment would be at an output of Y2. Here any increase in AD only causes inflation. In practise it is difficult to know precisely what counts as full employment. Practical reasons make it difficult for every firm to operate at 100% capacity. Optimal capacity may considered to be 85%

Full Employment and NAIRU

Another related measure of full employment is the level of unemployment when the economy is at the NAIRU rate of inflation. This is the level of unemployment with a non accelerating rate of inflation. This equates to the Monetarist view of the Phillips curve. However, the NAIRU could be quite high due to supply side factors such as frictional and structural unemployment.

• More on Natural Rate of Unemployment
• Causes of Unemployment