key term - Full Employment

Definition

Full employment is an economic condition in which all or most of those who are able and willing to work are employed. It represents a situation where the unemployment rate is at or near its natural rate, indicating that the economy is operating at its maximum productive capacity without causing excessive inflationary pressures.

5 Must Know Facts For Your Next Test

1. Full employment is the level of employment where the economy is operating at its maximum productive capacity without causing excessive inflation.
2. Achieving full employment is a key macroeconomic goal, as it indicates an efficient allocation of resources and promotes economic growth and stability.
3. The natural rate of unemployment, or the non-accelerating inflation rate of unemployment (NAIRU), represents the minimum level of unemployment consistent with full employment.
4. Okun's Law describes the inverse relationship between the unemployment rate and the output gap, suggesting that reducing unemployment below the natural rate can boost economic growth.
5. Policymakers often use fiscal and monetary policies to help the economy reach and maintain full employment, balancing the objectives of low inflation and maximum sustainable output.

Review Questions

• Explain how the concept of full employment is related to the unemployment rate and the natural rate of unemployment.
  • Full employment is the condition where the unemployment rate is at or near the natural rate of unemployment, which represents the minimum level of unemployment consistent with stable inflation. The natural rate of unemployment is the result of normal job turnover and frictional factors in the labor market, even when the economy is operating at its maximum productive capacity. When the actual unemployment rate is at the natural rate, the economy is considered to be at full employment, indicating an efficient allocation of resources and the absence of excessive inflationary pressures.
• Describe how the AD/AS model incorporates the concept of full employment and its relationship to economic growth, unemployment, and inflation.
  • In the AD/AS model, full employment is represented by the point where the aggregate demand (AD) curve intersects the vertical, long-run aggregate supply (LRAS) curve. At this point, the economy is operating at its potential GDP, which is the maximum sustainable output level at full employment. Any output above potential GDP would lead to inflationary pressures, while output below potential GDP would result in unemployment. The AD/AS model demonstrates that maintaining full employment is crucial for achieving stable economic growth, low unemployment, and price stability.
• Analyze the role of automatic stabilizers in helping the economy achieve and maintain full employment, and how this relates to the neoclassical view of the economy.
  • Automatic stabilizers, such as unemployment insurance and progressive taxation, play a key role in helping the economy achieve and maintain full employment. These stabilizers automatically increase government spending and reduce tax revenue during economic downturns, helping to support aggregate demand and prevent the economy from falling too far below its potential GDP. This, in turn, helps the economy return to full employment more quickly. The neoclassical view, which emphasizes the self-correcting nature of the economy, would suggest that the role of automatic stabilizers is less important, as the economy would naturally gravitate towards full employment without significant government intervention. However, the Keynesian perspective, which emphasizes the importance of aggregate demand management, highlights the value of automatic stabilizers in promoting full employment and economic stability.

Related terms

Natural Rate of Unemployment:

The level of unemployment that exists in an economy due to normal job turnover and frictional factors, even when the economy is operating at full employment.

Potential GDP:

The maximum output an economy can sustain at full employment, without causing inflation to rise.

Okun's Law:

The empirical relationship between the unemployment rate and the output gap, which suggests that a 1% increase in the unemployment rate is associated with a 2-3% decrease in real GDP.