Full Employment and the Economy

Contrary to popular belief, full employment does not mean that everyone has a job. To many economists, full employment means that unemployment has fallen to the lowest possible level without causing inflation. Since full employment is considered a “sweet spot” when all available labor resources are being used in the most efficient way possible, surpassing full employment can lead to a sort of inflationary period in the economy as companies have to raise wages in order to attract workers. As a result, there is more disposable income available to be spent, resulting in higher demand and consequently more expensive goods and services. Rising prices can affect how fast the Fed raises interest rates in order to combat this inflation in the economy that can be partially caused by a full employment environment.

Frictional¹, structural² or voluntary unemployment can still exist in full employment. However, full employment cannot exist when there is cyclical³ or deficient demand⁴ unemployment. Full employment is considered to be the “ideal employment rate” within an economy at a given time based on the region and the current macroeconomic and political climate. There is no direct method for measuring full employment; rather, it is a “theoretical state” within the economy that is estimated by the Federal Reserve. The current “natural unemployment rate”, also known as the Non-Accelerating Rate of Unemployment or NAIRU, is currently being estimated as between 4.5 and 5 percent. This is otherwise known as policymakers’ goal of full employment.

In September 2018, the unemployment rate in the U.S. fell to 3.7%, the lowest rate in almost 50 years, and it has stayed consistent throughout November for the third month in a row. The biggest worry is that this may signal an imminent recession. Every recession since October 1969 has been preceded by an unemployment trough. However, unlike all other recessions in history, there has not been a rise in wages to indicate inflation. The demographics of the economy have also been changing with an older workforce as people prolong their retirement. Consequently, very low unemployment may not be as strong of a leading indicator of a recession as it has been historically.

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¹ in between jobs but are still considered to be present in the labor force

² jobs are available but there are not enough people in the workforce who have the necessary skills to do the job

³ unemployment that is affected by the rising and falling of the business cycle across different sectors of the economy

⁴ there is not enough demand in the current economic state to support the full employment goal.