Full employment refers to an economic condition where everyone can find work and get employed. There is no shortage of labor resources, and they are used efficiently in all sectors of the economy, which means that both skilled and unskilled workers can get work. It also implies that everyone who has the ability and willingness to work is employed. However, it needs to be understood that full employment does not mean that everyone has a job in the country, which suggests that the definition of full employment is not relevant in real life, as it is not possible for a country to have such a strong economy in which the unemployment level is equal to zero. The classical theory explains that the economy has full employment when there is no inflation.
It challenges the Keynesian view that policymakers can effectively intervene and create an aggregate demand which leads to full employment. The classical view assumes that policymakers are ineffective, and market participants are well-informed about changes in the policy in advance, and they can act to respond to it. Economists use the term “full employment” to refer to a situation where unemployment has reached the level at which inflation does not increase. The central bank considers a specific unemployment level, such as 4%-4.5% in the United States, at which it assumes the economy to have full employment.
It is argued that when unemployment decreases, inflation increases as people earn more and start spending on buying products and services, which pushes up their prices and the inflation rate. Furthermore, full employment in an economy implies that there is no cyclical unemployment. Moreover, an economy with full employment can still have some underemployment which implies that some part-time workers may have difficulty in getting work. It is also argued that there could be some level of voluntary unemployment caused by individuals who can work deciding not to work for any reason. Furthermore, it is stated that there is frictional unemployment in the economy, which is due to the time required by individuals to find a job after completing their college or school education.
There are positive effects of full employment on the economy, which is considered to be operating at its full capacity under this condition, and there is no demand-deficient unemployment. Moreover, there is no output gap which implies that there is high and sustainable economic growth. There is no shortage of skills, and companies can effectively use them to develop new products and services. The aggregate demand for these products and services increases because more individuals enter the job market every year who earn to spend on purchases. Businesses invest in their expansion as the aggregate demand for their products and services increases. The economy achieves productive efficiency with low or no wastage, and businesses have significant earnings. Full employment removes inequality and relative poverty arising due to unemployment, and it overcomes social problems as well. The government has more income to spend on human welfare and wellbeing.
There are some negative effects of full employment as it is argued that it is not possible to sustain this condition and economic growth for an extended period because of the resulting limitations related to population growth and available resources. It eventually leads to a labor shortage and wage inflation. There will be a time when the market resources will exhaust, and the government will have to allow immigrants to fill in the demand. Furthermore, economic growth also generates jobs that may not be popular, and individuals are reluctant to work in these positions, which leads to a rise in the unemployment level. This was the case in the United Kingdom in the 1950s when there was full employment, and the government had to allow migration to countries that had abundant labor who was willing to work in such jobs.