full employment

The phrase 'full employment' sounds as if it should mean everybody who wants a job has one — zero unemployment. But economists mean something more subtle. Because frictional and structural unemployment never disappear, even the healthiest economy has people between jobs or temporarily mismatched. Full employment is the situation where the only unemployment left is this unavoidable kind — there is no cyclical unemployment from weak demand. It is 'full' in the sense that the economy is using all the labour it sensibly can.

In practice, full employment is defined as the level of employment that corresponds to the natural rate of unemployment. If the natural rate is 5 percent, then the economy is at full employment when unemployment is around 5 percent — not zero. At that point, anyone who is unemployed is searching for a better match or caught in a structural mismatch, not idled by a lack of overall spending. The economy is producing at its potential output, the most it can sustain without generating accelerating inflation.

Full employment is one of the chief goals of economic policy, often written into law as a central-bank mandate (frequently alongside stable prices). The honest difficulty is that nobody knows exactly where it is, because the natural rate is only an estimate. Aiming too low risks leaving people needlessly jobless; pushing past it risks overheating and inflation. Full employment is also not the same as everyone being content — it can coexist with low pay, underemployment, and discouraged workers who have dropped out of the count, which is why it is a necessary goal but not a complete measure of a good labour market.