Full Employment

Full employment is usually defined as any level of employment under 5%. Full employment means that all eligible workers regardless of skill level are in jobs. Economists believe that unemployment falls until it reaches the “natural rate” where everyone is employed and new hires only occur when people leave their current jobs for higher wages at other positions. The  U.S economy has been in a state of full employment because the last unemployment numbers have come in at 4.7%. Usually full employment results in a period of inflation as a result of an increase in disposable income which drives up prices. The U.S economy is currently in a low inflationary period which contradicts the idea of full employment, but due to the recent recession, the current low inflation period can be seen as a result of that.

Full employment does not mean 0% employment, as previously mentioned, different types of unemployment can still exist. Structural unemployment is a result of a skills gap. Jobs are available but people do not have the necessary skills to fill these positions. This is more likely with large/sudden technological changes. Frictional unemployment is the amount of unemployment that results from workers being in between jobs but are still in the labor force. This is a result of misinformation and is seen as temporary unemployment. Finally, voluntary employment results from a person’s conscious effort to remain unemployed so they are no longer counted as being part of the workforce.

Because full employment does not translate to 0% unemployment, there is usually reason to believe that the unemployment numbers may be misstated. Unemployment numbers also seem understated from the changes in part-time and full-time employment.  Firms hiring part-time workers do lower the unemployment rate, but these workers may not be happy in their current position and still want to work towards a full-time position that is not available. This questioning of the unemployment rate  was even more prevalent in our latest presidential cycle where the current President stated that unemployment numbers were fake and too low, and even ventured to (falsely) state that unemployment may be as high as 42%. Unemployment may not be as low as 4.8% because of an increase in voluntary employment from the recent recession as well as structural unemployment stemming from the loss in manufacturing jobs and increase in technology heavy roles.

 

Unemployment Rate

 

 

5 comments to Full Employment

  • cohend17

    After reading this post, I cannot help but think of professor Davies’ International Finance class. In that class we spent some time discussing internal and external balance, as well as policy associated with achieving each state. Based on this data, it seems like the United States is currently at a state of Internal Balance, usually defined by full employment and price level stability (though it is true that we are still trying to achieve slightly higher levels of inflation, it seems like price levels are under a reasonable amount of control). What we have not achieved, is External Balance, which is defined by a Current Account equal to zero. We currently run a current account deficit, meaning that our imports are greater than our exports. From what I recall/understand, in purely theoretical terms, economists are always trying find simultaneous internal and external equilibrium. However, if increasing exports is pursued as a policy option, does that not mean output will move to a point greater that Y=Full employment? Is an increase in exchange rate the only option?

    • Good, so a potential blog topic is the magnitude of international imbalances. Big relative to GDP? How to account for financial flows (profits earned overseas, US profits paid to non-residents).

      Is it in fact possible to have all 3 in balance? Or even any two, low inflation and low unemployment?

  • ghimirer17

    It is reassuring to see that unemployment rates have been steadily decreasing over the years. In addition, I appreciate your refresher on the different types of unemployment that prevent us from reaching 0% such as structural, frictional, and voluntary – but I wonder about the theory of the “natural rate of unemployment.” When learning about in macroeconomics, I was confused as to why unemployment – especially in regards to structural unemployment – was seen as just something that happens rather than something that can be prevented. While I certainly agree that there is a difference in the skills that workers have and that technology has made this even more of a phenomena – I wonder what would happen if there were training programs where the skill-set could better match the type of jobs that are available and if this could/would reduce the amount of structural unemployment? I am sure it is much more complicated than this but workers in fossil fuels come to mind when thinking about this. While there is a lot of investment happening in renewable energy, I fear that the labor force will experience a lot of structural unemployment due to a large set of skills being set around the extraction of gas rather than energy from the sun or the wind – and I wonder if there is a way to solve this problem that still leaves people employed in the labor force and gives us cleaner energy as well in the future.

  • wedmonds

    I am very eager to see what happens during Trump’s time in office. As you’ve mentioned, unemployment rates have dropped to the lowest levels in a decade, and have reached the level determined by the Federal Reserve Board of Governors as “long term equilibrium.” The Fed will watch unemployment carefully to ensure that unemployment doesn’t continue to fall too much, and overheat the economy. In this case, it will continue to rise interest rates as a way to counteract elevated growth levels, above the Fed’s target levels. As Trump continues to mention his focus on bringing jobs to America, I wonder how much lower he expects the unemployment rate to go, and furthermore, are much lower levels beneficial to the economy?

  • Later this term we’ll look at data in more detail. Is unemployment a good measure? If so, which unemployment measure (the BLS reports U1 thru U6)? Some of this gets at the issue of structural unemployment, but surveys that rely on “are you looking for work” may not tell us what we really want to know (cf. Rachana’s comment).

Germane comments welcome! – others treated as spam.