Full employment, also known as maximum employment, is one of the metrics used to measure the overall health of the economy. Used alongside other important statistics it guides the decisions made by the Fed to stabilize inflation. Full employment also determines the unemployment rate which is measured by the number of people available for work who don’t have jobs and have actively looked for one in the past four weeks.
A low unemployment rate is a positive economic indicator. Those who are employed tend to spend more money which stimulates business growth. However, there can be a point of diminishing returns where too much unemployment can be damaging. Full employment is the optimal point without driving inflation.
What is Full Employment
Full employment is the lowest point of unemployment we can achieve before starting to cause inflation. Another way of defining it is anyone who is willing to work, is able to find a job. Full employment is not the same as a zero percent unemployment rate. There are many factors that affect unemployment even in the best economies.
Even the current definition used to determine unemployment may not accurately portray employment status. For example, a factor that could impact unemployment is discouraged workers who have stopped looking because they thought there were no openings. When including discouraged workers, the unemployment rate tends to be a full percentage point higher than what is reported.
To determine the optimal unemployment rate, we need to understand the different types of unemployment.
Types of Unemployment
Cyclical unemployment is unemployment that rises and falls within the normal business cycle. If the economy is in a recession, then unemployment rises. If the economy is strong, the unemployment rate falls. During a recession, the government lowers interest rates to encourage spending and stimulate the economy. Conversely, when we reach the point of full employment the government increases interest rates to control inflation. This is the type of unemployment that government policies have the most effect on.
Structural unemployment is when the available jobs or in-demand jobs require a skill set that most unemployed people do not possess. The skills gap has become an issue in recent years with more people going to college instead of trade schools. This leaves industries struggling to fill positions which drives up costs. This is similar to voluntary unemployment where someone chooses to remain unemployed because they are looking for a specific job or wage.
Frictional unemployment refers to people who are in between jobs for any reason. This includes someone who resigns from a job and has a break before entering a new position. This also includes anyone who quit or was fired from a job for reasons unrelated to the economy.
What to Expect in a Full Employment Market
When the economy reaches full employment the competition between companies to find employees increases. This means skilled workers can demand higher wages with more benefits. A competitive labor market is beneficial for individuals but bad for the economy over time. Large-scale wage increases drive up the costs of goods and services. This causes inflation and diminishes the value of currency if left unchecked. We saw this during the pandemic as many workers elected to stay home to collect unemployment or resigned from their positions to accept a new role with a different company. This increased demand for qualified workers and left many positions unfilled. A labor shortage requires businesses to find new ways to attract employees and match salary demands.
One-way companies are trying to meet the salary demands of employees while keeping costs down is by investing in automation and outsourced staffing. This is one of the reasons why Evans Resource Solutions (ERS), a business division of Evans Distribution Systems, was created. ERS is a staffing service that specializes in labor-intensive positions. ERS provides staffing solutions for both temporary and long-term needs. Companies save money by outsourcing because it directs resources toward improving products or services instead of recruiting.