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What is Full Employment

What is Full Employment

Every economy aims for 'full employment'. The term sounds like a happy situation when everyone is employed but of course not every person in the economy is employed.
Urvashi Pokharna
You would probably think that a 100% employment rate is the ideal employment situation for any economy. In reality, full employment is not literal in its meaning. So, I'd suggest that you first understand the concept fully.

Full employment is a state of employment when everyone or almost everyone who is willing and capable to work, at the prevailing wage rate and work environment, is employed. That is, the entire work force is almost fully employed. The unemployment rate in such a situation is close to zero.

If everyone was to have a job and there was no unemployment, everyone will have purchasing power. This will make the demand rise and there will be a shortage in the supply of goods and services, leading to rise in prices. Ultimately, companies will be forced to lay off some employees causing a nationwide rise in the rate of unemployment to bring an equilibrium to such an economic situation. Hence, there is an ideal unemployment rate that keeps the economy in balance. Most world economies aim at a frictional unemployment rate that is anywhere between 2% to 7%. The United States lists the following rates of unemployment for the mentioned age groups to be ideal for the economy to be in a state of full or complete employment.
  • For Americans aged 16 years or more: 4%
  • For Americans aged 20 years or more: 3%
Also, in case of full employment, a cyclical unemployment rate of zero percent is ideal. This indicates that rate of growth in employment is proportional to the rate of growth of the economy. In such a situation, all skilled and unskilled labor, that can be employed, have jobs. However, there may not be 100% employment due to frictional unemployment. Frictional unemployment means the transitional period in which a person is searching for a job, i.e., the time period between quitting one job and joining another. But, such persons are still in labor force. Now, let's take a look at the two most important employment acts passed in the US legislature.

Employment Act, 1946

Formerly known as the Full Employment Act, the Employment Act of 1946 was passed post World War II when the fear of another depression loomed large over the American economy. The US federal government decided to take matters into its own hands to stabilize the inflation and unemployment rates prevalent in the economy at that time. Thus, this act was a safeguard measure to prevent rise in the rate of unemployment at the prospect of 12 million American soldiers returning home post war. As the United States prepared to win against this prospective economic downturn after winning the war, the newly formed Keynesian theories of economics were employed. Rejecting the theory of self-adjustment of a capitalist economy, government intervention was targeted at preventing rise of prices and providing jobs to everyone, by increasing purchasing power of the people, encouraging private spending and maximizing production capacity. The Employment Act of 1946 ultimately resulted in the formation of the Council of Economic Advisories and the Joint Economic Committee to assist the President in national policy-making. It successfully maintained the unemployment rates and prevented a huge plunge in the economic growth.

Full Employment and Balanced Growth Act, 1978

After 1970, the United States was posed with another economic threat of rising unemployment rates along with substantial price fluctuations and a rather slow-moving progress. This stimulated an amendment of the act of 1946 into a new act, the Full Employment and Balanced Growth Act of 1978, which was much more similar to the original Full Employment Bill of 1945 proposed by Senator James Murray. The bill was opposed by the conservatives, including the business community of the nation, for being liberal in its approach and was consecutively altered into what we know as the Employment Act of 1946, changing the government's motive from full or complete employment to pursuing maximum employment. This act is also called the Humphrey-Hawkins Full Employment Act and was a rather a more aggressive form of the previous one. It unabashedly propagates the nation to strive for full or complete employment, balance of trade and budget, price stabilization and increase in production capacity, by relying on private enterprises. It also requires the federal government to clearly state national economic goals in numeric terms. If the private enterprises fail to meet these goals, the government must create low-income employment opportunities as a compensatory measure.

One of the most inefficient measures often taken by governments to keep unemployment rates in check is to keep the interest rates high. However, this generally tends to have an opposite effect on an already dwindling inflation rate. Since 100% employment rate is quite impossible to achieve for any economy in the present state of world affairs, the concept of Non-Accelerating Inflation Rate of Unemployment (NAIRU) is more feasible to follow. It sets the ideal level of unemployment which is the rate below which the inflation rises and the real gross domestic product is the same as the potential output. This can be achieved by stimulating the aggregate demand. Hence, any rate of inflation under the level of unemployment is not fatal to the economy's health.

A nation's government can achieve full employment, by providing government jobs to people who have failed to secure employment in private enterprises through training programs that provide a job guarantee. Also, this will greatly reduce the cost of unemployment to an economy.