key term - Full Employment

Definition

Full employment refers to a state of the economy where all individuals who are able and willing to work are employed. It represents a situation where the unemployment rate is at its lowest sustainable level, and the economy is operating at its maximum productive capacity.

5 Must Know Facts For Your Next Test

1. Full employment is a key goal of macroeconomic policy, as it promotes economic growth, stability, and social welfare.
2. The production possibilities frontier (PPF) represents the maximum output an economy can produce given its resources, and full employment is achieved when the economy is operating on the PPF.
3. The unemployment rate is a primary measure of labor market conditions, and the full employment unemployment rate is the lowest sustainable rate consistent with price stability.
4. Monetary policy can influence the unemployment rate, but policymakers must be cautious to avoid the pitfalls of trying to push the unemployment rate below the full employment level.
5. Automatic stabilizers, such as unemployment insurance and progressive taxation, can help maintain full employment by cushioning the impact of economic downturns and supporting aggregate demand.

Review Questions

• Explain how the concept of full employment relates to the production possibilities frontier (PPF) and social choices.
  • The production possibilities frontier (PPF) represents the maximum output an economy can produce given its resources and technology. Full employment is achieved when the economy is operating on the PPF, as this indicates that all available labor and other resources are being utilized to their fullest potential. Policymakers must balance the trade-offs between different goods and services produced, as well as the distribution of those goods and services, to achieve the socially optimal outcome on the PPF.
• Describe how economists define and compute the unemployment rate in the context of full employment.
  • Economists define the full employment unemployment rate as the lowest sustainable level of unemployment consistent with price stability. This is often referred to as the natural rate of unemployment, which includes frictional unemployment (temporary job transitions) and some level of structural unemployment (mismatch between worker skills and job requirements). To compute the unemployment rate, economists survey the labor force and divide the number of unemployed individuals by the total labor force. The full employment unemployment rate is the target that policymakers aim to achieve through macroeconomic policies.
• Analyze the potential pitfalls for monetary policy in trying to maintain full employment and the role of automatic stabilizers in supporting it.
  • Policymakers must be cautious when using monetary policy to try to push the unemployment rate below the full employment level, as this can lead to inflationary pressures and other economic distortions. Attempting to maintain unemployment rates that are too low can result in the economy overheating, leading to higher inflation and potentially destabilizing the financial system. Automatic stabilizers, such as unemployment insurance and progressive taxation, can help mitigate the impact of economic downturns and support aggregate demand, thereby maintaining full employment without the need for discretionary policy interventions that could create unintended consequences.

Related terms

Potential GDP:

The maximum level of output an economy can sustain when all resources, including labor, are fully employed.

Natural Rate of Unemployment:

The lowest sustainable unemployment rate in an economy, which is consistent with full employment.

Frictional Unemployment:

Temporary unemployment that occurs as workers transition between jobs, often due to the time required to find a new position.