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Full employment is a situation in which there is no cyclical or deficient-demand unemployment.[1] Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. For instance, workers who are "between jobs" for short periods of time as they search for better employment are not counted against full employment, as such unemployment is frictional rather than cyclical. An economy with full employment might also have unemployment or underemployment where part-time workers cannot find jobs appropriate to their skill level,[2] as such unemployment is considered structural rather than cyclical. Full employment marks the point past which expansionary fiscal and/or monetary policy cannot reduce unemployment any further without causing inflation.

Some economists define full employment somewhat differently, as the unemployment rate at which inflation does not continuously increase. Advocacy of avoiding accelerating inflation is based on a theory centered on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU), and those who hold it usually mean NAIRU when speaking of full employment.[3][4] The NAIRU has also been described by Milton Friedman, among others, as the "natural" rate of unemployment. Such views tend to emphasize sustainability, noting that a government cannot sustain unemployment rates below the NAIRU forever: inflation will continue to grow so long as unemployment lies below the NAIRU.

For the United States, economist William T. Dickens found that full-employment unemployment rate varied a lot over time but equaled about 5.5 percent of the civilian labor force during the 2000s.[5] Recently, economists have emphasized the idea that full employment represents a "range" of possible unemployment rates. 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%. This is the estimated unemployment rate at full employment, plus and minus the standard error of the estimate.[6]

The concept of full employment of labor corresponds to the concept of potential output or potential real GDP and the long run aggregate supply (LRAS) curve. In neoclassical macroeconomics, the highest sustainable level of aggregate real GDP or "potential" is seen as corresponding to a vertical LRAS curve: any increase in the demand for real GDP can only lead to rising prices in the long run, while any increase in output is temporary.

Economic concept

What most neoclassical economists mean by "full" employment is a rate somewhat less than 100% employment. Others, such as the late James Tobin, have been accused of disagreeing, considering full employment as 0% unemployment.[7] However, this was not Tobin's perspective in his later work.[8]

Some see John Maynard Keynes as attacking the existence of rates of unemployment substantially above 0%:

"The Co

Some economists define full employment somewhat differently, as the unemployment rate at which inflation does not continuously increase. Advocacy of avoiding accelerating inflation is based on a theory centered on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU), and those who hold it usually mean NAIRU when speaking of full employment.[3][4] The NAIRU has also been described by Milton Friedman, among others, as the "natural" rate of unemployment. Such views tend to emphasize sustainability, noting that a government cannot sustain unemployment rates below the NAIRU forever: inflation will continue to grow so long as unemployment lies below the NAIRU.

For the United States, economist William T. Dickens found that full-employment unemployment rate varied a lot over time but equaled about 5.5 percent of the civilian labor force during the 2000s.[5] Recently, economists have emphasized the idea that full employment represents a "range" of possible unemployment rates. 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%. This is the estimated unemployment rate at full employment, plus and minus the standard error of the estimate.[6]

The concept of full employment of labor corresponds to the concept of potential output or potential real GDP and the long run aggregate supply (LRAS) curve. In neoclassical macroeconomics, the highest sustainable level of aggregate real GDP or "potential" is seen as corresponding to a vertical LRAS curve: any increase in the demand for real GDP can only lead to rising prices in the long run, while any increase in output is temporary.

What most neoclassical economists mean by "full" employment is a rate somewhat less than 100% employment. Others, such as the late James Tobin, have been accused of disagreeing, considering full employment as 0% unemployment.[7] However, this was not Tobin's perspective in his later work.[8]

Some see John Maynard Keynes as attacking the existence of rates of unemployment substantially above 0%:

"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 and H. D. Henderson in a pamphlet to support Lloyd George in the 1929 election.[9]

Most readers would interpret this statement as referring to only cyclical, deficient-demand, or "involuntary unemployment" (discussed below) but not to unemployment existing as "full employment" (mismatch and frictional unemployment). This is because, writing in 1929, Keynes was discussing a period in which the unemployment rate had been persistently above most conceptions of what corresponds to full employment. That is, a situation where a tenth of the population (and thus a larger percentage of the labor force) is unemployed involves a disaster.

One major difference between Keynes and the Classical economists was that while the latter saw "full employment" as the normal state of affairs with a free-market economy (except for short periods of adjustment), Keynes saw the possibility of persistent aggregate-demand failure causing unemployment rates to exceed those corresponding to full employment. Put differently, while Classical economists saw all unemployment as "voluntary", Keynes saw the possibility that involuntary unemployment can exist when the demand for final products is low compared to potential output. This can be seen in his later and more serious work. In his General Theory of Employment, Interest, and Money, chapter 2, he used a definition that should be familiar to modern macroeconomics:

This state of affairs we sh

Some see John Maynard Keynes as attacking the existence of rates of unemployment substantially above 0%:

Most readers would interpret this statement as referring to only cyclical, deficient-demand, or "involuntary unemployment" (discussed below) but not to unemployment existing as "full employment" (mismatch and frictional unemployment). This is because, writing in 1929, Keynes was discussing a period in which the unemployment rate had been persistently above most conceptions of what corresponds to full employment. That is, a situation where a tenth of the population (and thus a larger percentage of the labor force) is unemployed involves a disaster.

One major difference between Keynes and the Classical economists was that while the latter saw "full employment" as the normal state of affairs with a free-market economy (except for short periods of adjustment), Keynes saw the possibility of persistent aggregate-demand failure causing unemployment rates to exceed those corresponding to full employment. Put differently, while Classical economists saw all unemployment as "voluntary", Keynes saw the possibility that involuntary unemployment can exist when the demand for final products is low compared to potential output. This can be seen in his later and more serious work. In his General Theory of Employment, Interest, and Money, chapter 2, he used a definition that should be familiar to modern macroeconomics:

This state of affairs we shall describe as "full" employment, both "frictional" and "voluntary" unemployment being consistent with "full" employment thus defined.One major difference between Keynes and the Classical economists was that while the latter saw "full employment" as the normal state of affairs with a free-market economy (except for short periods of adjustment), Keynes saw the possibility of persistent aggregate-demand failure causing unemployment rates to exceed those corresponding to full employment. Put differently, while Classical economists saw all unemployment as "voluntary", Keynes saw the possibility that involuntary unemployment can exist when the demand for final products is low compared to potential output. This can be seen in his later and more serious work. In his General Theory of Employment, Interest, and Money, chapter 2, he used a definition that should be familiar to modern macroeconomics:

The only difference from the usual definitions is that, as discussed below, most economists would add skill/location mismatch or structural unemployment as existing at full employment. More theoretically, Keynes had two main definitions of full employment, which he saw as equivalent. His first main definition of full employment involves the absence of "involuntary" unemployment:

the equality of the real wage to the marginal disutility of employment ... realistically interpreted, corresponds to the absence of "involuntary" unemployment.[10]

Put another way, the full employment and the absence of involuntary unemployment correspond to the case where the real wage equals the marginal cost to workers of supplying labor for hire on the market (the "marginal disutility of employment"). That is, the real wage rate and the amount of employment correspond to a point on the aggregate supply curve of labor that is assumed to exist. In contrast, a situation with less than full employment and thus involuntary unemployment would have the real wage above the supply price of labor. That is, the employment situation corresponds to a point above and to the left of the aggregate supply curve of labor: the real wage would be above the point on the aggregate supply curve of labor at the current level of employment; alternatively, the level of employment would be below the point on that supply curve at the current real wage.

Second, in chapter 3, Keynes saw full employment as a situation where "a further increase in the value of the effective demand will no longer be accompanied by any increase in output."

In the previous chapter we have given a definition of full employment in terms of the behavior of labo

Second, in chapter 3, Keynes saw full employment as a situation where "a further increase in the value of the effective demand will no longer be accompanied by any increase in output."

This means that at and above full employment, any increase in aggregate demand and employment corresponds primarily to increases in prices rather than output. Thus, full employment of labor corresponds to potential output.

Whilst full employment is often an aim for an economy, most economists see it as more beneficial to have some level of unemployment, especially of the frictional sort. In theory, this keeps the labor market flexible, allowing room for new innovations and investment. As in the NAIRU theory, the existence of some unemployment is required to avoid accelerating inflation.

Historica

Whilst full employment is often an aim for an economy, most economists see it as more beneficial to have some level of unemployment, especially of the frictional sort. In theory, this keeps the labor market flexible, allowing room for new innovations and investment. As in the NAIRU theory, the existence of some unemployment is required to avoid accelerating inflation.

For the United Kingdom, the OECD estimated the NAIRU (or structural unemployment) rate as being equal to 8.5% on average between 1988 and 1997, 5.9% between 1998 and 2007, 6.2%, 6.6%, and 6.7 in 2008, 2009, and 2010, then staying at 6.9% in 2011–2013. For the United States, they estimate it as being 5.8% on average between 1988 and 1997, 5.5% between 1998 and 2007, 5.8% in 2008, 6.0% in 2009, and then staying at 6.1% from 2010 to 2013. They also estimate the NAIRU for other countries.[11] These calculations have been criticised as lacking any foundation in evidence.[12]

The era after the 2007-2009 Great Recession shows the relevance of this concept, for example as seen in the United States. On the one hand, in 2013 Keynesian economists such as Paul Krugman of Great Recession shows the relevance of this concept, for example as seen in the United States. On the one hand, in 2013 Keynesian economists such as Paul Krugman of Princeton University see unemployment rates as too high relative to full employment and the NAIRU and thus favor increasing the aggregate demand for goods and services and thus labor in order to reduce unemployment. On the other hand, pointing to shortages of some skilled workers, some businesspeople and Classical economists suggest that the U.S. economy is already at full employment, so that any demand stimulus will lead to nothing but rising inflation rates. One example was Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank, who has since changed his mind.[13]

William Beveridge defined "full employment" as where the number of unemployed workers equaled the number of job vacancies available (while preferring that the economy be kept above that full employment level in order to allow maximum economic production).

This definition allows for certain kinds of unemployment, where the number of unemployed workers equals the number of vacancies. Unemployment of this kind can take two forms: frictional and structural. Frictional unemployment is where the unemployed are searching for the best possible jobs whilst employers are also searching for the best possible employees to fulfil those jobs. Structural unemployment exists when the skills and geographical locations of the unemployed workers do not correspond to the skill requirements and locations of the vacancies. In either case, there exists a job for every worker, and a worker for every job.

An economy with less than full employment in Beveridge's sense will have either classical unemployment, cyclical unemployment, or both. Classical unemployment results from the actual real wage rising above the equilibrium real wage, so that the quantity of labor demanded (and the number of vacancies) is less than the quantity of labor supplied (and the number of unemployed workers). This might occur because of inefficient interference in the market; for example, a minimum wage set above the equilibrium wage; but also because of market failure, such as that caused by cartels.

Under classical unemployment, the ways by which a return to Beveridge full employment can occur depend on the nature of the rise in wages- if it is only "nominal" wages that are rigid (failing to return to equilibrium), then real wages can decrease if prices rise relative to the rigid nominal wages. If nominal wages track price levels, however, then changes to prices will not affect the real wage- and thus employment will remain below Beveridge full employment.

Cyclical, deficient-demand, or Keynesian unemployment occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. If demand for most goods and services falls, less production is needed and consequently fewer workers are needed: if wages are sticky and do not fall to meet the new equilibrium level, unemployment results, because (as with classical unemployment) there are more prospective workers than there are vacancies.[14]

The Phillips curve