What is Meant by Full Employment? | Economics

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Unemployment is a social evil. From the economic point of view it represents a waste of society’s scarce (and valuable) resources. It thus lends to a permanent loss of society’s potential output (GNP). In other words, if there is unemployment, society’s actual output or GNP is less than society’s potential output. This is why most modern governments seek to pursue a policy of full employment.

Meaning of Full Employment:

Full employment refers to a situation in which people who are willing to work at existing wages are able to get jobs readily and quickly move from one job to another if he so wishes. According to Keynes, a situation of full employment is said to exist of there is no involuntary unemployment.

In a broad sense it refers to the full utilisation of all available labour (and other resources) so that the economy is able to produce its potential output (GNP). Full employment is on me of the major objectives of macroeconomic policy.

However, the term ‘full employment’ does not taken to mean a situation where everyone wanting to work and able to work is constantly employed.

There are two reasons for this:

(1) First, labour is not perfectly mobile,

(2) Secondly, in a dynamic world characterised by changes in tastes and pref­erence of buyers there will always be some people temporarily unemployed until they are in the process of moving from one job to another.

Unemploy­ment which arises due to immobility of labour rather than fall in the demand for labour is known as frictional or transitional unemployment. Such unemployment is experienced when workers are changing jobs and are unemployed for a short period between jobs.

Often people do not cease work because they get another job immediately. The period of time between jobs, be it a few days or a few months, is seasonal unemployment of a ‘frictional nature’. This type of unemployment is observed in those industries which experience marked seasonal patterns of demand such as farming, brick-laying, tourism, etc.

This type of unemployment arises because the markets do not operate smoothly. Frictional employment is only temporary and is normally ignored while defining full employment (or estimating full employment equilibrium). The economy is said to be at full employment when only frictional unemployment exists.

This means that everyone who wishes to work at the going wage-rate for his type of labour is employed, but since it takes time to switch from one job to another there will at any moment be a shall amount of unemployment. Thus the full employment level of GDP measures full capacity output, i.e., the maximum possible output the economy is capable of producing by employ­ing all resources to their feasible limits.

A specific (and quite serious) type of frictional unemployment arises when a major industry experiences a permanent fall in the demand for its products (or services). This is known as structural unemployment. More­over, in any Western economy there is also an element of residual unem­ployment because there will always be some people who cannot be employed on a permanent basis. The people who are unable to cope with the nature and complexity of modern production methods production methods and the disciplines of organized work fall in this category.

Unemployment other than those described above is due to deficiency of demand or purchasing power. Such unemployment is known as cyclical unemployment (because it is associated with the trade cycle). It is this type of unemployment with which Keynes was primarily concerned. He be­lieved that this types of unemployment would be eradicated by adopting demand management (i.e., monetary and fiscal) policies.

So full employment does not mean zero employment. It refers to a situation in which there is only cyclical unemployment. According to G.F. Stanlake it refers to a situation “when the number of vacancies is at least equal to the numbers out of work”.

In other words, a more realistic defini­tion of full employment goes as follows: Full employment is achieved when the number of registered unemployment is achieved when the num­ber of registered unemployment is equal to the number of job vacancies. However, even this measure is not quite accurate since many people like housewives and older workers may fail to register as unemployed when job prospects are bleak even though they wish to work.

For in macroeconomic purposes, however, most governments usually tend to define full employment in terms of some politically acceptable ort targeted level of unemployment (for example, 4% of the labour force), though the exact target level is rarely perfectly disclosed. Moreover, this level varies according to prevailing conditions.

Moreover, it is sometimes apprehended that a rise in labour productivity will lead to a fall in the demand for labour. In such a situation full employ­ment can only be maintained by increasing aggregate demand at the same rate as labour productivity.

Achieving Full Employment:

In the short run, when techniques of production remain unchanged, em­ployment varies directly with output. Since output in the short run is determined by demand, changes in employment are directly related to changes in demand. Once full employment has been achieved, any further increases in demand will only cause prices to rise. According to Keynes, the end of full employment is the beginning of inflation.

Full employment can be achieved by using expansionary demand-management, i.e., monetary and fiscal policies. Monetary policy works through changes in the rates of interest and availability of bank credit. For securing full employment it is necessary to encourage private investment and con­sumption spending by relaxing any restrictions on the commercial banks’ lending activities and the central bank, on behalf of the government, will take steps to bring about a fall in the rate of interest. Private spending may also be stimulated by a relation of any existing hire-purchase restrictions.

Fiscal policy works through a change in government expenditure or a change in taxes or in both at the same time. To create jobs, the government can act in a direct manner by increasing in own expenditures on goods and services while leaving taxation unchanged.

Alternatively, it might stimulate private spending (both consumption and investment) by cutting taxes. Since the workers have a high propensity to consume, an increase in unemployment compensation may be an effective way of bringing about an increase in consumption spending.

Private investment may be encouraged by offering incentives to inves­tors such as investment allowances or accelerated depreciation (so that the entire benefits of depreciation can be enjoyed in the very first year).

Keynes suggested that the government should budget for a deficit to create jobs. The government could start road construction or slum clearance programmes. But, fiscal policy often operates with a time lag. However, in an economy like our own, with a fairly large public sector, aggregate demand could be increased by raising the volume of investment of the public sector enterprises, but, again, these measures would not take effect immediately.

Conclusion:

In practice, 100% employment cannot be achieved. Inevita­bly there will always exist some unemployment due to labour turnover and people spending time in searching for and selecting new jobs and because of structural changes in the economy — job losses in declining industries which requires people to transfer to new jobs created in expanding sectors.