We hear a lot of hoopla about unemployment, when it comes to discussions about the strength of the economy. This is rightfully so, as high levels of unemployment can cause a rise in human rights issues, such as poverty, crime, and homelessness. However, what exactly does it mean to eliminate unemployment? In economics, we have a phrase for this: full employment. Here’s some information you need to understand what full employment is and how it works...
What is full employment?
It is important to note that full employment absolutely does not mean that unemployment reaches 0%. In the type of economy that we have, capitalism, that number is practically an impossible goal. Instead, full employment reaches a zone that we like to call the ‘optimal level’ of unemployment. This is usually somewhere in the range of 2%-3%, but it can also be higher, depending on other external factors in an economy. This extra unemployment above 0% is called frictional unemployment, which describes a zone of people who are in-between jobs and taking a little bit of time to regain their employment.
The real measure of full employment, however, lies entirely in the question of whether or not all labor resources in an economy are being properly utilized to maximize output. The entire study of economics is based around this idea of resource utilization. This specific amount of resources being utilized (including labor) is called capacity. When all resources are being utilized in a way that makes it impossible to increase output any further, then the economy is operating at full capacity. This concept must always be looked at when one is judging the unemployment rate, since it takes into consideration whether or not the jobs being taken are quality jobs that are contributing to the economy.
How is it accomplished
From a macroeconomic perspective, it can be incredibly difficult to achieve full employment. This is because there are many variables in the marketplace that are hard to predict. However, as a general rule, growth and capacity should always experience similar growth rates for a healthy economy to function and unemployment to remain stable. For example, if the capacity (labor resources) increases by 5% in a year, then the economy would also have to experience a 5% growth to keep full capacity. This may sound simple, but can be far more complex in real world practice, as emerging industries, velocity of currency, and competing internation markets can all have an effect.