The Goal of Full Employment

Meaning of Full Employment

Definition: Full employment is a macroeconomic goal where the level of unemployment is as low as possible without causing unacceptable levels of inflation. It doesn’t mean zero unemployment.
Why not zero unemployment? Aiming for a zero unemployment rate can lead to labor shortages, causing wages to rise rapidly and accelerating inflation.
Acceptable Range: Generally regarded as approximately 4.0-4.5% in Australia. This range can change over time.
Cyclical Unemployment: Full employment means no cyclical unemployment. This is unemployment caused by a lack of aggregate demand (AD) or a recession.
Natural Unemployment: It’s accepted that even in a healthy economy, there will be some natural unemployment.

KEY TAKEAWAY: Full employment is not zero unemployment. It is the lowest sustainable rate of unemployment that doesn’t fuel inflation.

Frictional Unemployment:
- Temporary unemployment as people move between jobs.
- Inevitable as people seek better opportunities.
Structural Unemployment:
- Mismatch between skills of the unemployed and the jobs available.
- Caused by changes in the structure of the economy (e.g., technological advancements).
Seasonal Unemployment:
- Unemployment that occurs at specific times of the year.
- E.g., tourism industry workers.
Hard-Core Unemployment:
- Individuals who are unemployed due to personal circumstances (e.g., disability, lack of skills, anti-social behaviour).
- Difficult to employ.

REMEMBER: Natural unemployment is unavoidable.

Definition: The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is the lowest rate of unemployment that can be sustained without causing inflation to accelerate.
Explanation:
- Below the NAIRU, labor shortages can push wages upwards, leading to cost-push inflation.
- Firms raise prices to protect profits, further fueling inflation.
NAIRU is not fixed: It can change over time due to various factors (e.g., changes in labor market flexibility, government policies, technological advancements).
Current Estimates: Recent research by the RBA suggests the NAIRU in Australia is around 4.0-4.5%, but this can change. Some suggest it may even be lower due to the gig economy.
Gig Economy Impact: The growth in the gig economy may have lowered the NAIRU by allowing people to more easily offer their labor, reducing structural unemployment.

EXAM TIP: Define NAIRU precisely. Explain the link between unemployment, wages, and inflation.

Employed: A person aged 15 or over working more than one hour per week for pay or profit.
Unemployed: A person aged 15 or over who is actively looking for work and is available to start immediately.
Labour Force: The total number of people who are either employed or unemployed.
Not in the Labour Force: People who are neither employed nor unemployed (e.g., students, retirees, stay-at-home parents).
Unemployment Rate:

\$\$
\text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labour Force}} \times 100
\$\$
* Participation Rate:

\[ \text{Participation Rate} = \frac{\text{Labour Force}}{\text{Working Age Population (15+)}} \times 100 \]

COMMON MISTAKE: Confusing the unemployment rate with the participation rate.

Labour Market Flexibility: More flexible labour markets (e.g., easier hiring and firing, less regulation) can lower the NAIRU.
Education and Training: Improved education and training can reduce structural unemployment, lowering the NAIRU.
Government Policies: Policies that encourage job creation (e.g., tax incentives, infrastructure spending) can help lower the NAIRU.
Technological Change: Can increase structural unemployment if workers lack the skills to adapt, potentially increasing the NAIRU in the short term.
Globalisation: Increased competition from overseas can put downward pressure on wages, potentially lowering the NAIRU.

APPLICATION: Consider how changes in technology and government policies can affect the NAIRU.

High Unemployment (Above NAIRU):
- Economic Costs:
  - Lower GDP: Fewer people working reduces national output.
  - Reduced Tax Revenue: Fewer people earning income means less income tax revenue.
  - Increased Government Spending: Higher welfare payments.
- Social Costs:
  - Increased crime rates.
  - Mental health issues.
  - Reduced social cohesion.
- Material Living Standards: Decreased due to lower income and consumption.
- Non-Material Living Standards: Decreased due to stress, social isolation, and health problems.
Low Unemployment (Below NAIRU):
- Economic Costs:
  - Accelerating Inflation: Labor shortages push up wages, leading to cost-push inflation.
  - Reduced International Competitiveness: Higher prices make exports less competitive.
- Potential Benefits:
  - Increased wage growth for workers.
  - Higher profits for businesses.

STUDY HINT: Create a table summarizing the costs and benefits of high vs. low unemployment.

Strong and Sustainable Economic Growth: Full employment contributes to economic growth by increasing the productive capacity of the economy.
Low Inflation (Price Stability): Achieving full employment without exceeding the NAIRU is crucial for maintaining low inflation.

VCAA FOCUS: Understand how the goal of full employment interacts with other macroeconomic goals.