Full Employment Unemployment Rate



The first definition of full employment would refer to a situation where the economy is operating on its production possibility frontier – there is pareto efficiency. Using AS/AD analysis this would be a situation, where the economy is operating at full capacity, on the vertical part of the LRAS. This would be consistent with economic growth at the long run trend rate of growth. For example, if the Long run trend rate was 3%, it would need economic growth to have averaged 3%. In other words at full employment there is no output gap.

In practise, this concept is hard to pin point exactly. For example, growth could be faster than the long run trend rate leading to a positive (inflationary) output gap.

  • Zero Unemployment – a zero unemployment rate. Everyone in employment, not a practical concept in a market economy. Though in the old Communist bloc countries, 0% unemployment rates were often claimed.
  • Zero unemployment – taking into account frictional unemployment. e.g. an unemployment rate of 2%.
  • Unemployment at the Natural Rate of unemployment. Another concept of unemployment could be a situation where there is no demand deficient unemployment. i.e. the only unemployment is the natural rate (this includes frictional, but, also structural unemployment.) This could be an unemployment rate of 4-5%

Related Concepts

Ideal Unemployment Rate – the optimal unemployment rate taking into account some frictional unemployment may be beneficial to give people time to find job suited to their skills.

For example, in 1999, in the United States, the Organisation for Economic Co-operation and Development (OECD) gives an estimate of the "full-employment unemployment rate" of 4 to 6.4%

British economist William Beveridge stated that an unemployment rate of 3% was full employment

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