Full Employment and Unemployment
What is Full Employment?
Also known as the natural rate of unemployment, it refers to a situation where all those people who are available and searching for a job at the prevailing remuneration rates. This only occurs when there is frictional unemployment; therefore, full employment does not mean zero unemployment.
Natural rate of Unemployment
Unemployment that exists even at full employment includes frictional and structural unemployment, and it can be reduced with supply-side policies.
Importance of Full Employment
- Maximises National Output (Real GDP): When most people are employed, the country can produce more goods and services. This increases real GDP and helps the economy grow sustainably.
- Increases Living Standards: With more people earning income, households can afford better housing, food, education, and healthcare. This leads to a higher overall standard of living in society.
- Reduces Government Spending on Benefits: If fewer people are unemployed, the government spends less on welfare and unemployment benefits. These funds can be redirected to other areas like infrastructure, education, or healthcare.
- Boosts Consumer Confidence and Demand: When people have jobs and steady income, they are more likely to spend money. This increases overall demand in the economy, which encourages businesses to invest and expand further.
What is Unemployment?
Unemployment consist of those of working age who are willing and able to work, actively seeking work but do not have a job.
How to measure the Unemployment rate?
Rate of Unemployment = ( Unemployed/ Working Population x 100)
This is the level of unemployment that corresponds to the level of unemployment that would exist if the economy were at its long-run level of production. This includes both frictional and structural unemployment.
How to measure unemployment?
- Claimant Count method – This measures the number of people who are out of work and claiming unemployment benefits. This is the easiest way as it counts all those registered as unemployed, as it relates to all those registered as unemployed or claiming the job seeker’s allowance. However, it might be subject to fraud or unable to compare between countries.
- Labour force survey – It is a survey to determine the number of employed and the rate of unemployment and hence determine the rate of unemployment. However, this method might be subject to sampling errors, costly, hidden unemployment, inactive groups, and disparities.
Types and Causes of Unemployment
- Frictional Unemployment – Those seeking first employment, or moving between jobs, or temporarily unemployed (seasonal unemployment).
- Structural Unemployment – Jobs are becoming obsolete due to a skillset that is no longer useful (Immobility of labour, both geographical and occupational).
- Cyclical Unemployment – Also known as demand-deficient, unemployment is a result of a lay-off, that is termination of employment due to business reasons.
How to reduce unemployment?
| Type | Policy | Description |
|---|---|---|
| Demand-side | Expansionary Fiscal policy | The government increases spending or cuts taxes |
| Expansionary Monetary policy | Lower interest rates to boost demand | |
| Supply-side | Education/training | Improves workers’ skills |
| Labour market reforms | Flexible wages reduce trade union power | |
| Incentives | Lower income tax to encourage work |
What is the Beveridge Curve?
The Beveridge Curve shows the inverse relationship between unemployment and job vacancies in an economy. It is an important tool for understanding the efficiency of the labour market.
When the economy is doing well, unemployment is low, and vacancies are high because firms are hiring. When there is a recession, vacancies fall and unemployment rises, moving along the Beveridge Curve.
However, if both unemployment and job vacancies are high, this suggests a mismatch between the skills of the unemployed and the skills employers are looking for. This is often due to structural unemployment, and shifts the curve outward.
An outward shift of the Beveridge Curve indicates a less efficient labour market where, even though jobs exist, the unemployed can’t fill them, either due to skill gaps or geographical immobility.