Investopedia: What is 'Full Employment'?

Full Employment

What is 'Full Employment'

Full employment is an economic situation 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 time. Any remaining unemployment is considered to be frictional, structural or voluntary.
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BREAKING DOWN 'Full Employment'

Full employment is considered to be any acceptable level of unemployment above 0%. Full employment exists without any cyclical or deficient-demand unemployment, but does exists with some level of frictional, structural and voluntary unemployment. Full employment is seen as the ideal employment rate within an economy and is normally represented by a range of rates that are specific to regions, time periods and political climates.

A government or economy often defines full employment as any rate of unemployment below a defined number. If, for example, a country sets full employment at a 5% unemployment rate, any level of unemployment below 5% is considered acceptable. Full employment, once attained, often results in an inflationary period. The inflation is a result of workers having more disposable income, which would drive prices upward.
Types of Unemployment That Affect Full Employment

Full employment can also be defined as any economic situation that is devoid of cyclical or deficient-demand unemployment. Cyclical unemployment is the fluctuating 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. Therefore, for an economy to be at full employment, it cannot be in a recession that's causing cyclical unemployment.

Deficient-demand unemployment is similar to cyclical unemployment in that it arises when there isn't enough aggregate demand in an economy to support full employment. Declining aggregated demand is a characteristic of a recession. Full employment cannot exist when there isn't enough demand to support the workforce.

The final three types of unemployment can exist in situations in which full employment also exists. Structural unemployment arises outside of the business cycle when there is a skills gap. This unemployment occurs when there are jobs available but the unemployed population does not have the knowledge or skill level to perform the required tasks. Technology is a leading cause of structural unemployment.

Frictional unemployment represents the amount of unemployment that results from workers who are in between jobs, but are still in the labor force. Many economists have estimated that the average amount of frictional unemployment in the United States ranges from 2 to 7%.

Finally, voluntary employment occurs when a person makes a conscious decision to remain unemployed. This happens when there are jobs available but a worker cannot find a job of his or her specific choice.
Next Up Structural Unemployment

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Structural Unemployment
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Structural unemployment is a longer-lasting form of unemployment caused by fundamental shifts in an economy and exacerbated by extraneous factors such as technology, competition and government policy. Reasons why structural unemployment occurs include workers' lack of requisite job skills or that workers live too far from regions where jobs are available and cannot move closer. Jobs are available, but there is a serious mismatch between what companies need and what workers can offer.
BREAKING DOWN 'Structural Unemployment'
Structural unemployment is caused by forces other than the business cycle. This means that structural unemployment can last for decades and may need radical change to redress the situation. If structural unemployment is not addressed, it can increase the unemployment rate long after a recession is over and can increase the natural rate of unemployment.

For example, hundreds of thousands of well-paying manufacturing jobs have been lost in the United States over the past three decades as production jobs have migrated to lower-cost areas in China and elsewhere. This decline in the number of jobs creates a higher natural rate of unemployment. Growing technology in all areas of life increases future structural unemployment, since workers without adequate skills will get marginalized. Even those with skills may face redundancy, given the high rate of technological obsolescence.
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