Question

What is Full Employment ?

Hint:

Full employment corresponds to the "Natural Rate of Unemployment." If unemployment falls below this, the economy might overheat and cause high inflation.

Answer 1

Step 1: Understanding the Concept:
In a healthy economy, full employment does not mean that \( 100% \) of the workforce is working. It refers to a state where the demand for labor equals the supply of labor at the prevailing wage.
Step 2: Detailed Explanation:
Key aspects of full employment:
1. Absence of Involuntary Unemployment: This occurs when everyone who is willing and able to work at the current wage rate finds a job.
2. Presence of Natural Unemployment: Even at full employment, there is always some "Frictional Unemployment" (people between jobs) and "Structural Unemployment" (mismatch of skills).
3. Voluntary Unemployment: People who choose not to work at the given wage are not counted as "unemployed" in the context of the full employment target.
Keynesian economics defines it as the point where further increases in aggregate demand lead to inflation rather than more output.
Step 3: Final Answer:
Full employment is a state of the economy where all those who are able and willing to work at existing wages are employed, except for those undergoing brief transitions between jobs.