Full employment - AbsoluteAstronomy.com

Macroeconomics

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so.
It is defined either as absolutely 0% rate of unemployment, as by James Tobin

James Tobin

James Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...

, or as the level of employment rates when there is no cyclical unemployment. It is defined by the majority of mainstream

Mainstream economics

Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...

economists as being an acceptable level of natural unemployment above 0%, the discrepancy from 0% being due to non-cyclical types of unemployment. Unemployment above 0% is advocated as necessary to control inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, which has brought about the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU

NAIRU

In monetarist economics, particularly the work of Milton Friedman, on which also worked Lucas Papademos and Franco Modigliani in 1975,NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment, and refers to a level of unemployment below which inflation rises.It is widely used in...

); the majority of mainstream economists mean NAIRU when speaking of "full" employment.

Economic concept

What most neoclassical economists

Neoclassical economics

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

mean by "full" employment is a rate somewhat less than 100% employment, considering slightly lower levels desirable. Others, such as James Tobin

James Tobin

, vehemently disagree, considering full employment as 0% unemployment
.

Rates of unemployment substantially above 0% have also been attacked by John Maynard Keynes

John Maynard Keynes

John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

"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 in a pamphlet to support Lloyd George in the 1929 election.

20th century British economist William Beveridge

William Beveridge

William Henry Beveridge, 1st Baron Beveridge KCB was a British economist and social reformer. He is best known for his 1942 report Social Insurance and Allied Services which served as the basis for the post-World War II welfare state put in place by the Labour government elected in 1945.Lord...

stated that an unemployment rate of 3% was full employment. Other economists have provided estimates between 2% and 13%, depending on the country, time period, and the various economists' political biases.

Before Friedman and Phelps

Edmund Phelps

Edmund Strother Phelps, Jr. is an American economist and the winner of the 2006 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Early in his career he became renowned for his research at Yale's Cowles Foundation in the first half of the 1960s on the sources of economic growth...

, Abba Lerner developed a version of the NAIRU. Unlike the current view, he saw a range of "full employment" unemployment rates. He distinguished between "high" full employment (the lowest sustainable unemployment under incomes policies) and "low" full employment (the lowest sustainable unemployment rate without these policies).

"Ideal" unemployment

An alternative, more normative, definition (used by some labor economists) would see "full employment" as the attainment of the ideal unemployment rate, where the types of unemployment that reflect labor-market inefficiency (such as structural unemployment) do not exist. Only some frictional unemployment would exist, where workers are temporarily searching for new jobs. For example, Lord William Beveridge

William Beveridge

defined "full employment" as where the number of unemployed workers equaled the number of job vacancies available. He preferred that the economy be kept above that full employment level in order to allow maximum economic production.

Long run aggregate supply

The concept of full employment has so far been used in conjunction with the long run aggregate supply (LRAS) curve, where long run potential output is also the full employment level of output. Full employment does not mean that there is 'zero unemployment', but rather that all of the people willing and able to work have jobs at the current wage rate. Full employment is the quantity of labour employed when the labour market is in equilibrium.

NAIRU

The following should be understood in discussions of NAIRU: governments that follow it are attempting to keep unemployment at certain levels (usually over four percent, and as high as ten or more percent) by keeping interest rates high. As interest rates increase, more bankruptcies of individuals and businesses occur, meaning less money to hire staff or purchase goods (the making and distributing of which requires workers, which means jobs). It might also be noted that the main cause of inflation is not high employment, but rather the ability of banks to make money with little to no backing with things of value (commodities such as gold and silver are some examples), thus flooding the market with money and decreasing the value of each dollar already issued in the process, assuming the economy has not kept up to this increase in issued loans. Economists such as Milton Friedman and Dr. Ravi Batra have theorized ways that a modern economy could have low inflation and near full employment (as in close to 100% of those who are not students and are healthy enough to work, and who wish to work at any given point in time), as of yet these have yet to be widely disseminated through the press or introduced by most governments. Paul Martin - former finance minister and past Prime Minister of Canada - once held that full employment could be achieved, yet let go of this idea after gaining power.

Friedman's view has prevailed so that in much of modern macroeconomics

Macroeconomics

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

, full employment means the lowest level of unemployment that can be sustained given the structure of the economy. Using the terminology first introduced by James Tobin

James Tobin

(following the lead of Franco Modigliani

Franco Modigliani

Franco Modigliani was an Italian economist at the MIT Sloan School of Management and MIT Department of Economics, and winner of the Nobel Memorial Prize in Economics in 1985.-Life and career:...

), this equals the Non-Accelerating Inflation Rate of Unemployment (NAIRU

NAIRU

) when the real gross domestic product

Gross domestic product

Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

equals potential output

Potential output

In economics, potential output refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints...

. This concept is identical to the "natural" rate but reflects the fact that there is nothing "natural" about an economy.

At this level of unemployment, there is no unemployment above the level of the NAIRU. That is, at full employment there is no cyclical or deficient-demand unemployment. If the unemployment rate stays below this "natural" or "inflation threshold" level for several years, it is posited that inflation will accelerate, i.e. get worse and worse (in the absence of wage and price controls). Similarly, inflation will get better (decelerate) if unemployment rates exceed the NAIRU for a long time. The theory says that inflation does not rise or fall when the unemployment equals the "natural" rate. This is where the term NAIRU

NAIRU

is derived.

The level of the NAIRU thus depends on the degree of "supply side" unemployment, i.e., joblessness that can't be abolished by high demand. This includes frictional, structural, and classical unemployment

Unemployment

Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

Phillips curve

Ideas associated with the Phillips curve

Phillips curve

In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation...

questioned the possibility and value of full employment in a society: this theory suggests that full employment—especially as defined normatively—will be associated with positive inflation

Inflation

. The Phillips curve tells us also that there is no single unemployment number that one can single out as the "full employment" rate. Instead, there is a trade-off

Trade-off

A trade-off is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect...

between unemployment and inflation: a government might choose to attain a lower unemployment rate but would pay for it with higher inflation rates.
In 1968, Milton Friedman

Milton Friedman

Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, leader of the monetarist school of economics, and Edmund Phelps

Edmund Phelps

posited a unique full employment rate of unemployment, what they called the "natural" rate of unemployment. But this is seen not as a normative choice as much as something we are stuck with, even if it is unknown. Rather than trying to attain full employment, Friedman argues that policy-makers should try to keep prices stable (a low or even a zero inflation rate). If this policy is sustained, he suggests that the economy will gravitate to the "natural" rate of unemployment automatically.

Structural unemployment

Some Economists estimate a "range" of possible unemployment rates. For example, in 1999, in the United States, the Organisation for Economic Co-operation and Development

Organisation for Economic Co-operation and Development

The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...

(OECD) gives an estimate of the "full-employment unemployment rate" of 4 to 6.4%. This is the estimated "structural" unemployment

Structural unemployment

Structural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment...

rate, (the unemployment when there is full employment), plus & minus, the standard error

Standard error

Standard error can refer to:* Standard error , the estimated standard deviation or error of a series of measurements* Standard error stream, one of the standard streams in Unix-like operating systems...

of the estimate. (Estimates for other countries are also available from the OECD.) http://www.oecd.org/dataoecd/44/50/2086120.pdf

Full employability

Full employability indicates an attempt by government to make people "employable" by both positive means (e.g. training courses) and negative means (e.g. cuts in benefits). It does not necessarily create full employment.

Technical issues

Whatever the definition of full employment, it is difficult to discover exactly what unemployment rate it corresponds to. In the United States, for example, the economy saw stable inflation despite low unemployment during the late 1990s, contradicting most economists' estimates of the NAIRU.

The idea that the full-employment unemployment rate (NAIRU) is not a unique number has been seen in recent empirical research. Staiger, Stock, and Watson found that the range of possible values of the NAIRU (from 4.3 to 7.3% unemployment) was too large to be useful to macroeconomic policy-makers. Robert Eisner suggested that for 1956-95 there was a zone from about 5% to about 10% unemployment between the low-unemployment realm of accelerating inflation and the high-unemployment realm of disinflation

Disinflation

Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time. It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down...

. In between, he found that inflation falls with falling unemployment.

Worse, the NAIRU doesn't stay the same over time—and can change due to economic policy. For example, some economists argue that British Prime Minister Margaret Thatcher

Margaret Thatcher

Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...

's anti-inflation policies using persistently high unemployment led to higher structural unemployment and a higher NAIRU.

Policy

The active pursuit of national full employment

Employment

Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

through interventionist government policies is associated with Keynesian economics

Keynesian economics

Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

and marked the postwar agenda of many Western nations, until the stagflation

Stagflation

In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

of the 1970s.

Australia

Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

was the first country in the world in which full employment in a free society was made official policy by its government

Government

Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

. On May 30, 1945, The Australian Labor Party

Australian Labor Party

The Australian Labor Party is an Australian political party. It has been the governing party of the Commonwealth of Australia since the 2007 federal election. Julia Gillard is the party's federal parliamentary leader and Prime Minister of Australia...

Prime Minister

Prime Minister of Australia

The Prime Minister of the Commonwealth of Australia is the highest minister of the Crown, leader of the Cabinet and Head of Her Majesty's Australian Government, holding office on commission from the Governor-General of Australia. The office of Prime Minister is, in practice, the most powerful...

John Curtin

John Joseph Curtin , Australian politician, served as the 14th Prime Minister of Australia. Labor under Curtin formed a minority government in 1941 after the crossbench consisting of two independent MPs crossed the floor in the House of Representatives, bringing down the Coalition minority...

and his Employment Minister John Dedman

John Dedman

John Dedman was a Minister in the Australian Labor Party governments led by John Curtin and Ben Chifley. He was responsible for organising production during World War II, establishing the Australian National University, reorganising the Commonwealth Scientific and Industrial Research Organisation ...

proposed a white paper

White paper

A white paper is an authoritative report or guide that helps solve a problem. White papers are used to educate readers and help people make decisions, and are often requested and used in politics, policy, business, and technical fields. In commercial use, the term has also come to refer to...

in the Australian House of Representatives

Australian House of Representatives

The House of Representatives is one of the two houses of the Parliament of Australia; it is the lower house; the upper house is the Senate. Members of Parliament serve for terms of approximately three years....

titled Full Employment In Australia, the first time any government apart from totalitarian

Totalitarianism

Totalitarianism is a political system where the state recognizes no limits to its authority and strives to regulate every aspect of public and private life wherever feasible...

regimes had unequivocally committed itself to providing work for any person who was willing and able to work. Conditions of full employment lasted in Australia from 1941 to 1975. This had been preceded by the Harvester Judgment

Harvester Judgment

The Harvester Judgment was a benchmark legal case for ensuring workers in Australia were paid a fair basic wage. The case had national ramifications and was of international significance....

(1907), establishing the basic wage (a living wage

Living wage

In public policy, a living wage is the minimum hourly income necessary for a worker to meet basic needs . These needs include shelter and other incidentals such as clothing and nutrition...

); while this earlier case was overturned, it remained influential.

United States

The United States is, as a statutory matter, committed to full employment (defined as 3% unemployment for persons 20 and older, 4% for person aged 16 and over), the government is empowered to effect this goal, and a job is a right. The relevant legislation is the Employment Act

Employment Act

The Employment Act of 1946 ch. 33, section 2, 60 Stat. 23, codified as , is a United States federal law. Its main purpose was to lay the responsibility of economic stability of inflation and unemployment onto the federal government...

(1946), initially "Full Employment Act", later amended in the Full Employment and Balanced Growth Act (1978). The 1946 act was passed in the aftermath of World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

, when it was fear that demobilization would result in a depression, as it had following World War I

World War I

World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...

in the Depression of 1920–21, while the 1978 act was passed in following the 1973–75 recession

1973–75 recession

The 1973–75 recession in the United States or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the general post-World War II economic boom. It differed from many previous recessions as being a stagflation, where high unemployment...

and in the midst of continuing high inflation.

The law states that full employment is one of four economic goals, in concert with growth in production, price stability, and balance of trade

Balance of trade

The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...

and budget

Balanced budget

A balanced budget is when there is neither a budget deficit or a budget surplus – when revenues equal expenditure – particularly by a government. More generally, it refers to when there is no deficit, but possibly a surplus...

, and that the US shall rely primarily on private enterprise to achieve these goals. Specifically, the act is committed to an unemployment rate of no more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over (from 1983 onwards), and the Act expressly allows (but does not require) the government to create a "reservoir of public employment" to effect this level of employment. These jobs are required to be in the lower ranges of skill and pay so as to not draw the workforce away from the private sector.

However, since the passage of this act in 1978, the US has, never achieved this level of employment, nor has such a reservoir of public employment been created.

Job guarantee

Some, particularly Post-Keynesian economists have suggested ensuring full employment via a job guarantee

Job guarantee

A job guarantee is an economic policy proposal aimed at providing a sustainable solution to the dual problems of inflation and unemployment. Its aim is to create full employment and price stability...

program, where those who are unable to find work in the private sector are employed by the government, the stock of thus employed public sector workers fulfilling the same function as the unemployed do in controlling inflation, without the human costs of unemployment.

External sources

The OECD on measuring the NAIRU
Devine, James. 2004. The "Natural" Rate of Unemployment. In Edward Fullbrook, ed., A Guide to What's Wrong with Economics, London, UK: Anthem Press, 126-32.
Eisner, Robert. 1997. A New View of the NAIRU. In Paul Davidson and Jan A. Kregel, eds. Improving the Global Economy. Cheltenham, UK: Edgar Elgar, 1997.
Friedman, Milton. 1968. The Role of Monetary Policy. American Economic Review. 58(1) March: 1-21.
Lerner, Abba. 1951. Economics of Employment, New York: McGraw-Hill.
Staiger, Douglas, James H. Stock, and Mark W. Watson. 1997. The NAIRU, Unemployment and Monetary Policy. Journal of Economic Perspectives. 11(1) Winter: 33-49.

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.

Economic concept

"Ideal" unemployment

Long run aggregate supply

NAIRU

Phillips curve

Structural unemployment

Full employability

Technical issues

Policy

Australia

United States

Job guarantee

See also

External sources