Full Employment

Definition

Full employment is a macroeconomic concept that describes a situation where all available labor resources are being used to their fullest extent. It represents a state of the economy where everyone who is willing and able to work is employed, and the unemployment rate is at its lowest sustainable level.

5 Must Know Facts For Your Next Test

1. Full employment is associated with the economy operating at its productive capacity, as represented by the production possibilities frontier.
2. Achieving full employment is a key policy objective for governments, as it promotes economic growth, price stability, and social welfare.
3. The natural unemployment rate, which includes frictional and structural unemployment, is considered the lowest sustainable unemployment rate in an economy.
4. When the economy is at full employment, any increase in aggregate demand will lead to inflationary pressures rather than an increase in real output.
5. Maintaining full employment is a delicate balance, as excessive demand can lead to inflation, while insufficient demand can result in high unemployment.

Review Questions

• Explain how the concept of full employment is related to the production possibilities frontier (PPF).
  • The production possibilities frontier represents the maximum output an economy can produce with its available resources. When an economy is at full employment, it is operating at a point on the PPF, where all resources, including labor, are being utilized to their fullest extent. This means the economy is producing the maximum possible output given its current technology and resource constraints. Any point inside the PPF would indicate the economy is not achieving full employment, as there are unused resources that could be employed to increase production.
• Describe the relationship between full employment and social choices in an economy.
  • Achieving full employment is a key social and economic objective, as it promotes stability, growth, and improved living standards. When an economy is at full employment, it is operating at its productive capacity, which means the society is making the most efficient use of its resources to produce the maximum possible output. This allows for greater choices and opportunities for the population, as the economy can produce a wider range of goods and services to meet the diverse needs and preferences of the citizens. However, maintaining full employment requires careful policy decisions, as excessive demand can lead to inflation, while insufficient demand can result in high unemployment, which can have significant social and economic consequences.
• Analyze how the concept of full employment is related to the broader macroeconomic goal of achieving potential GDP.
  • Potential GDP represents the maximum level of output an economy can sustain when all resources, including labor, are fully employed. When an economy is operating at full employment, it is producing at its potential GDP level, as all available labor resources are being utilized. Maintaining full employment is crucial for an economy to reach and maintain its potential GDP, as any unused labor resources would result in a gap between actual and potential output. Policymakers often use full employment as a target to guide their macroeconomic policies, as achieving and sustaining full employment is a key step in helping the economy reach its maximum sustainable output and growth potential.

Related terms

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

Natural Unemployment Rate: The lowest sustainable unemployment rate in an economy, which includes frictional and structural unemployment.

Aggregate Demand:

The total demand for all goods and services in an economy at a given price level and time.