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Full Employment

Updated on January 29, 2024
Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Full Employment?

Full employment in economics refers to the ideal situation in which every individual looking for a job is employed. That is, it is a state of zero unemployment. However, according to economists, such a situation is unattainable; hence, in practicality, high employment is desired and considered efficient.

Full Employment Meaning

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Full employment maximizes economic efficiency and results from the various policies a government implements. Moreover, it is essential as it affects many other macroeconomic factors like GDP, inflation, etc. Therefore, an economy where everyone is employed will have maximum productivity and better living conditions.

Key Takeaways

  • Full employment can be referred to as an economic condition where every person looking for a job finds one. That is, there will be zero unemployment.
  • As desirable as the situation is, it is equally unattainable. Zero unemployment is ideal because it requires every economic unit to work 100% efficiently, but that is impossible.
  • When everyone is employed in an economy, it increases people’s living standards and contributes to economic growth and development.

Full Employment Theory in Economics Explained

Full employment is an attractive and desirable economic scenario. Ideally, it means that everyone has a job. But it is theoretically unattainable. It would require the market and other systems to work 100% efficiently, but that is not the case.

Competition has increased with a growing population with access to many resources and opportunities. As a result, some people cannot land a job for various reasons. The increased human resources and better educational properties parallel to a lack of employment generation create an imbalance where the number of eligible hands increases but job opportunities decrease.

While on one side of the coin, people are struggling to find employment, on the other side, industries suffer from a talent drain because they cannot find qualified human resources. To address this issue, governments constantly alter and introduce many economic policies to create job opportunities.

A high employment rate sure has benefits. But an economist would point out the downside to full employment for the rest of the employed population – inflation. When everyone has a job, they are well-to-do and can afford goods and services. However, this would push up the demand and then the prices.

But this can’t be a justification for not achieving zero unemployment. In an efficient market, every citizen should prosper by working on themselves and their skills to stay competitive and not be replaced by another workforce. Here too, the government plays a huge role.

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Graph

The full employment equilibrium is plotted in the graph shown below. Again, the real GDP (output) is taken along the X-axis, and the price level is along the Y-axis.

Full Employment Graph

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At the intersection point of the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply (LRAS), the economy works at full potential, and hence, full employment is attained.

Examples of Full Employment

Consider the following examples of full employment.

Example #1

Country X is a developing nation. Before the pandemic hit, the employment rate was 97.5%, but many people lost their jobs with the lockdowns and layoffs. Two years after the pandemic, only 72% of the working population was employed. The country was slowly inching toward poverty.

Around a quarter of the population were sustaining their lives thanks to government allowances. But this was becoming too much of a burden for the government, as the GDP was down too. Also, the national debt reached a new high. Therefore, the government decided to thoroughly reconstruct employment policies to create jobs.

Example #2

Let’s take a look at the United States employment report published recently. The report provides information regarding employment statistics. According to the report, 315,000 jobs were added in August 2022 alone. Also, the unemployment rate rose to 3.7%. Of course, some sectors, like legal services, auto manufacturing, etc., cut off jobs, but mostly it is good news.

Economists and managers are enthusiastic and have a lot to talk about the report and how it looks for economic factors. Some believe that the increase in job creation can be due to a rise in immigrant influx. However, despite the good news, many are skeptical of the prospects for full employment equilibrium as the labor market is turbulent, especially after the pandemic.

Benefits

Zero unemployment dramatically benefits the economy as well as individuals. First, let’s see how it can be advantageous to people. When a person is employed, they can make a living for themselves and fulfill their needs. It helps bring people out of poverty and supports them financially.

Employed people can also provide for their dependents’ education, health, etc. Hence, more opportunities are available to everyone. This increases the living standards of people. Further, it reduces income inequality.

On the other hand, looking from an economic perspective, the economy works at its full potential when everyone is employed in a country. Therefore, productivity and efficiency will be high. This contributes to an increase in GDP, a decrease in national debt, accelerated economic growth, and a rise in public expenditure by the government. Thus, employment is closely related to people’s personal and public welfare.

Frequently Asked Questions (FAQs)

1. When is the economy at full employment?

Full employment in economics refers to the situation of zero unemployment. It is an ideal case where everyone belonging to the working population is employed. Hence, the unemployment rate should be zero, and economic efficiency should be high.

2. Does full employment mean zero unemployment?

Yes. Theoretically, full employment should connote zero unemployment. However, practically, it is impossible, as it would require everyone to have a job. For this, though, the market should be working with maximum efficiency. But that, too, is unattainable. Therefore, the focus of most governments now is lower unemployment rather than zero.

3. How to achieve full employment?

Zero unemployment can be attained through economic policies to create jobs for everyone, train them, and specialize them in specific skills. This will help a maximum number of people secure a job. But, of course, this would require a massive restructuring of the economy and market.

This article has been a guide to what is Full Employment and its definition. Here, we explain the topic in detail including its graph, examples, and benefits. You may also find some useful articles here –

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