The meaning of full employment

Full employment represents the highest level of employment possible. It occurs when nearly all available workers are employed, allowing the economy to operate at its productive potential.

Characteristics of full employment

• Unemployment rate - Full employment is typically reached when the unemployment rate falls to around 3%, though this figure can differ across countries depending on economic conditions.
• Not zero unemployment - Even at full employment, some unemployment persists because workers are often transitioning between jobs, such as leaving one role to start another.
• Productive efficiency - An economy at full employment uses its resources effectively and operates on its production possibility curve (PPC), maximising output without wasting factors of production.

Equilibrium unemployment and its causes

Equilibrium unemployment happens when the aggregate demand for labour equals the aggregate supply of labour. At this point, there is no upward or downward pressure on real wage rates, but some workers remain without jobs due to various supply-side issues.

Reasons for equilibrium unemployment

Even when labour demand equals supply, unemployment can occur because some individuals in the labour force are unable or unwilling to take available jobs.

Key causes include:

• Workers who refuse jobs at the prevailing wage rate, seeking better pay or conditions.
• Lack of awareness about job openings, leading to delays in finding suitable employment.
• Absence of necessary skills or qualifications for the roles on offer.
• Inability to relocate to areas where jobs are available, due to factors like family commitments or high moving costs.

The aggregate labour force and supply curves

The aggregate labour force (ALF) consists of all employed workers plus those actively looking for work. The ALF curve shifts closer to the aggregate supply of labour (ASL) curve as wage rates increase, because higher wages encourage more people to join or stay in the workforce.

Types of equilibrium unemployment

Equilibrium unemployment encompasses several forms, all stemming from supply-side challenges:

• Voluntary unemployment - Workers opt out of available jobs because the wage is too low, choosing to wait for better opportunities.
• Frictional unemployment - Short-term joblessness during transitions, such as when workers move between roles or locations.
• Structural unemployment - Long-term mismatches between workers' skills and job requirements, often due to changes in industry demands or technology.

Disequilibrium unemployment and its causes

Disequilibrium unemployment arises when the aggregate supply of labour exceeds the aggregate demand for labour, creating an imbalance in the labour market. This type is often linked to economic downturns and can coexist with equilibrium unemployment in the same economy.

Factors keeping wages above equilibrium

Wage rates may stay higher than the market-clearing level, preventing the labour market from balancing.

These factors include:

• Resistance from workers to accept pay reductions, which could lower their living standards.
• Actions by trade unions to negotiate and maintain higher wages for members.
• Government policies, such as setting a national minimum wage, which keeps pay above what the market might otherwise determine.

Consequences of lowering wage rates

Reducing wages to address disequilibrium unemployment is not always effective, as it could decrease overall spending power in the economy. This might lead to lower aggregate demand, reduced business activity, and a potential downward spiral of further job losses.

Main type of disequilibrium unemployment

Cyclical unemployment - This occurs during economic recessions when demand for goods and services falls, leading businesses to cut back on hiring or lay off workers. It is involuntary in nature, as affected individuals want to work but cannot find opportunities.

Voluntary and involuntary unemployment

Unemployment can be classified based on whether workers choose to be jobless or are forced into it by circumstances. Distinguishing between these types is not always straightforward in real-world situations.

Voluntary unemployment

Voluntary unemployment occurs when individuals decide not to take available jobs at the current wage rate. Workers might prefer to stay unemployed while searching for roles that offer higher pay or better conditions. This can be influenced by factors like unemployment benefits; if benefits are close to or exceed potential wages, people may extend their job search rather than accept low-paid work. Some frictional unemployment falls into this category, especially when it involves deliberate job hunting.

Involuntary unemployment

Involuntary unemployment happens when workers are eager to accept jobs at the prevailing wage but cannot secure employment due to a lack of opportunities. Most structural and cyclical unemployment is involuntary, as it results from broader economic issues like skill mismatches or recessions, rather than personal choice.

Challenges in distinguishing voluntary and involuntary unemployment

In practice, it can be difficult to categorise unemployment clearly. For example, a highly skilled professional who only finds low-skilled jobs might be seen as voluntarily unemployed if they refuse them, but this could also be viewed as involuntary if no suitable roles exist. The boundary often depends on individual circumstances and available alternatives.