Full employment

Full employment marks the point past which expansionary fiscal and/or monetary policy cannot reduce unemployment any further without causing inflation.

Some economists define full employment somewhat differently, as the unemployment rate at which inflation does not continuously increase.

For the United States, economist William T. Dickens found that full-employment unemployment rate varied a lot over time but equaled about 5.5 percent of the civilian labor force during the 2000s.

[5] Recently, economists have emphasized the idea that full employment represents a "range" of possible unemployment rates.

For example, in 1999, in the United States, the Organisation for Economic Co-operation and Development (OECD) gives an estimate of the "full-employment unemployment rate" of 4 to 6.4%.

In neoclassical macroeconomics, the highest sustainable level of aggregate real GDP or "potential" is seen as corresponding to a vertical LRAS curve: any increase in the demand for real GDP can only lead to rising prices in the long run, while any increase in output is temporary.

This is because, writing in 1929, Keynes was discussing a period in which the unemployment rate had been persistently above most conceptions of what corresponds to full employment.

That is, a situation where a tenth of the population (and thus a larger percentage of the labor force) is unemployed involves a disaster.

One major difference between Keynes and the Classical economists was that while the latter saw "full employment" as the normal state of affairs with a free-market economy (except for short periods of adjustment), Keynes saw the possibility of persistent aggregate-demand failure causing unemployment rates to exceed those corresponding to full employment.

That is, the real wage rate and the amount of employment correspond to a point on the aggregate supply curve of labor that is assumed to exist.

In contrast, a situation with less than full employment and thus involuntary unemployment would have the real wage above the supply price of labor.

Whilst full employment is often an aim for an economy, most economists see it as more beneficial to have some level of unemployment, especially of the frictional sort.

For the United Kingdom, the OECD estimated the NAIRU (or structural unemployment) rate as being equal to 8.5% on average between 1988 and 1997, 5.9% between 1998 and 2007, 6.2%, 6.6%, and 6.7 in 2008, 2009, and 2010, then staying at 6.9% in 2011–2013.

On the other hand, pointing to shortages of some skilled workers, some businesspeople and Classical economists suggest that the U.S. economy is already at full employment, so that any demand stimulus will lead to nothing but rising inflation rates.

Cyclical, deficient-demand, or Keynesian unemployment occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work.

Though their theory had been proposed by the Keynesian economist Abba Lerner several years before,[15] it was the work of Milton Friedman, leader of the monetarist school of economics, and Edmund Phelps that ended the popularity of this concept of full employment.

Further, rather than trying to attain full employment, Friedman argues that policy-makers should try to keep prices stable (meaning a low or even a zero inflation rate).

In an effort to avoid the normative connotations of the word "natural," James Tobin (following the lead of Franco Modigliani), introduced the term the “Non-Accelerating Inflation Rate of Unemployment” (NAIRU), which corresponds to the situation where the real gross domestic product equals potential output.

The level of the NAIRU depends on the degree of "supply side" unemployment, i.e., joblessness that can't be abolished by high demand.

This causes the short run Phillips curve to shift to the right and upward, worsening the trade-off between inflation and unemployment.

But if the unemployment rate rises to equal the NAIRU, we see higher inflation than before the expansionary policies, as at point C in the nearby diagram.

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.

Interventionist full employment policies, targeted especially at young people, remain in place in the Nordic countries.

[17] A commitment to full employment was also restored in the United Kingdom under New Labour (1997–2010), which manifested in the New Deal which lasted from 1998 until 2010.

[18] The United States is, as a statutory matter, committed to full employment; the government is empowered to effect this goal.