What Is Full Employment?

Full employment is an economic situa on in which all available labor resources are being used in the
most efficient way possible. Full employment embodies the highest amount of skilled and unskilled
labor that can be employed within an economy at any given me.

True full employment is an ideal—and probably unachievable—situa on in which anyone who is

willing and able to work can find a job, and unemployment is zero. It is a theore cal goal for
economic policymakers to aim for rather than an actually observed state of the economy. In prac cal
terms, economists can define various levels of full employment that are associated with low but non-
zero rates of unemployment.

Key Takeaways

 Full employment is when all available labor resources are being used in the most efficient
way possible.

 Full employment embodies the highest amount of skilled and unskilled labor that can be
employed within an economy at any given me.

 Economists define various types of full employment based on their theories as targets for
economic policy.

 Many modern economists agree that some unemployment is necessary to avoid infla on
and to allow workers to move between jobs, pursue educa on, or improve their skills.

 Unemployment of 5% or lower is o en considered full employment in a real-world context.

Investopedia / Sydney Saporito

Understanding Full Employment

Full employment is seen as the ideal employment rate within an economy at which no workers are
involuntarily unemployed. Full employment of labor is one component of an economy that is
opera ng at its full produc ve poten al and producing at a point along its produc on possibili es
fron er. If there is any unemployment, then the economy is not producing at full poten al, and some
improvement in economic efficiency may be possible.

However, because it may not be prac cally possible to eliminate all unemployment from all sources,
full employment may not actually be a ainable. For many economists, newer understandings of full
employment require some degree of unemployment to temper infla on and allow workers to move
between jobs, pursue their educa on, or improve their skills.1

An unemployment rate of 5% is o en considered full employment. This level of unemployment is

enough to minimize infla on and allow workers to move between jobs, but those wan ng full- me
work should be able to find a full- me job (even if it is not their preferred occupa on).Investopedia /
Sabrina Jiang.

The Phillips Curve

In terms of cyclical unemployment, many macroeconomic theories present full employment as a goal
that, once a ained, o en results in an infla onary period. The link between infla on and
unemployment is a prominent part of the Monetarist and Keynesian theories. This infla on is a result
of workers having more disposable income, which would drive prices upward, according to the
concept of the Phillips curve.

This poses a poten al problem for economic policymakers, such as the U.S. Federal Reserve, that
have a dual mandate to achieve and maintain both stable prices and full employment.2 If there is, in
fact, a trade-off between employment and infla on, per the Phillips curve, then simultaneous full
employment and price stability may not be possible.

The Austrian School

On the other hand, some economists also argue against the overzealous pursuit of full employment,
especially via the over-expansion of money and credit through monetary policy. Economists of
the Austrian School believe that this will result in damaging distor ons to the financial and
manufacturing sectors of the economy. This might even result in more unemployment in the long run
by precipita ng a subsequent recession as real resource constraints come into conflict with ar ficially
increased demand for various types of capital goods and complementary labor.

Types of Unemployment
Unemployment can result from cyclical, structural, fric onal, or ins tu onal causes. Policymakers
can focus on reducing the underlying causes of each of these types of unemployment, but in doing
so they may face trade-offs against other policy goals.

Structural

The desire to encourage technological progress can cause structural unemployment. For example,
when workers find themselves obsolete due to the automa on of factories or the use of ar ficial
intelligence.

Ins tu onal

Ins tu onal unemployment arises from ins tu onal policies that affect the economy. These can
include governmental programs promo ng social equity and offering generous safety net benefits,
and labor market phenomena, such as unioniza on and discriminatory hiring.

Fric onal

Some unemployment may be unavoidable by policymakers en rely, such as fric onal

unemployment, which is caused by workers voluntarily changing jobs or first entering the workforce.
Searching for a new job, recrui ng new employees, and matching the right worker to the right job
are all a part of it.

Cyclical

Cyclical unemployment is the fluctua ng type of unemployment that rises and falls within the
normal course of the business cycle. This unemployment rises when an economy is in a recession
and falls when an economy is growing.1 Therefore, for an economy to be at full employment, it
cannot be in a recession that’s causing cyclical unemployment.

The Phillips curve is cyclical. It posits that full employment inevitably results in higher infla on, which
in turn leads to increasing unemployment.
For the most part, macroeconomic policymakers focus on reducing cyclical unemployment to move
the economy toward full employment. In this case they may face trade-offs against rising infla on or
the risk of distor ng other sectors of the economy.

Cyclical unemployment, which is driven by changes in economic cycles, should not be confused with
"seasonal unemployment," where there are changes in the workforce that predictably occur
throughout the year, For example, jobs in the retail sector typically decrease a er the tradi onal run-
up to the holiday shopping season ends a er New Year's. Unemployment rises when people hired for
the holidays are no longer needed to meet demand.

Types of Full Employment

Due to the difficulty, and ques onable desirability, of achieving true full employment, economists
have developed other, more pragma c goals for economic policy.

Natural Rate

The natural rate of unemployment represents only the amount of unemployment due to structural
and fric onal factors in labor markets. The natural rate serves as an achievable approxima on of full
employment while accep ng that technological change and the normal transac on costs of labor
markets will always mean some modest unemployment at any given point in me.

Non-Accelera ng Infla on Rate

The non-accelera ng infla on rate of unemployment (NAIRU) represents the rate of unemployment
that is consistent with a low, stable rate of price infla on. The NAIRU is useful as a policy target for
economic policymakers who operate under a dual mandate to balance full employment and stable
prices.

This is not full employment, but it is the closest the economy can be to full employment without
excessive upward pressure on prices from increasing wages. Modern economists o en mean the
NAIRU when they refer to full employment.1 Note that the NAIRU only makes sense conceptually
and as a policy target if and when there is indeed a stable trade-off between unemployment and
infla on, as posited by the Phillips curve.

Benefits of Full Employment

Full employment can provide a number of benefits both to individuals and to the overall social and
economic balance of a country. As employment increases toward full employment, benefits include:

 Reduced poverty if all workers have access to work at or above the prevailing rate of
compensa on

 Improved wages and working condi ons as employers must complete for workers

 Preven ng the unemployed from becoming demo vated or losing valuable skills

 GDP growth as workers are able to afford goods and services

 Reduc on in government spending on unemployment benefits and welfare programs

 Less government borrowing due to increased revenue from income taxes

Examples of Full Employment

Full employment is an ideal condi on. As a result, there are no real-world examples of full
employment. Countries work to increase employment towards full employment and lower the rate
of unemployment.

However, there are examples of what economists consider full employment, which is when a
country's unemployment is as close to zero as real-world condi ons allow without triggering infla on
or other economic hardships. In general, full employment in the real world is o en considered 95%
employment or higher.

By the end of 2021, countries whose reported unemployment rates could be considered full
employment included Bahrain (1.9%), Benin (1.6%), Cuba (2.8%), Germany (3.5%), Japan (2.8%),
Malta (3.5%), Mexico (4.4%), the Netherlands (4%), Norway (5%), Poland (3.4%), and Thailand
(1.4%).

In the United States, the unemployment rate was 3.4% in January 2023, one of the lowest historical
rates since 1948. The lowest unemployment rate in the U.S. since 1948 was 2.7% in 1952.3 Both of
these rates would be considered full employment by economists.

Unemployment numbers, however, do not take into account those who have dropped out of the
workforce en rely because they have stopped looking for work, even if they would prefer to have a
job, or those who are working part- me but would prefer full- me work. Under true full
employment condi ons, anyone who wanted to find a full- me job would be able to.

What Rate Is Considered Full Employment?

Many economists consider an unemployment rate of 5% or lower to be maximum employment, or as

close to full employment as is possible in the real world. This means that the rate of full employment
is 95% or above.

How Do You Know If There Is Full Employment?

In the United States, the Bureau of Labor Sta s cs considers full employment to be happening
when the unemployment rate is equal to the NAIRU, there is no cyclical unemployment, and the
country's GDP is at its poten al.1 For many countries, these condi ons are met when the
unemployment rate is at 5% or lower.

Why Is There Unemployment at Full Employment?

Full employment and zero unemployment are not the same thing in the real world. Some types of
unemployment are unavoidable or even necessary to prevent infla on, allow workers to move
between jobs, or give people the chance to improve their educa on or job skills. Industries and
companies also change, which changes the available jobs, and this process is eventually beneficial to
the economy even if it leaves some workers temporarily unemployed.4

The Bo om Line
Full employment is when all available labor resources are being used in the most efficient way
possible without triggering infla on. It is a theore cal state in which anyone who wants to find full-
me work can do so and unemployment is at 0%.
Many modern economists agree that some unemployment is necessary to avoid infla on. Temporary
unemployment can also allow workers me to move between jobs, go to school or otherwise
improve their skills. In the real world, an unemployment rate of 5% or lower is o en considered full
employment. This level of unemployment prevents infla on and lets workers move between jobs,
but is low enough that those wan ng full- me work should be able to find some kind of full- me job.