Full Employment
Expert reviewed • 14 August 2024 • 9 minute read
What is the Objective of Full Employment?
Full employment is a key objective of economic policy, aiming to achieve the highest possible employment rate without triggering inflation.
Full employment does not mean zero unemployment. Instead, it refers to a situation where everyone willing and able to work can find a job within a reasonable period. In economic terms, full employment is achieved when the economy reaches the Natural Rate of Unemployment (NRU) or the Non-Accelerating Inflation Rate of Unemployment (NAIRU). To better understand this chapter, first read the chapter on the NAIRU
Now, the reason that there can never be zero unemployment is because there will always be some level of frictional, structural, and seasonal unemployment. The ultimate goal of full employment, however, is to minimise cyclical unemployment, which arises from economic downturns.
What is the Importance of Full Employment?
Achieving full employment is crucial for several reasons. The main reasons are as follows:
- Firstly, higher rates of employment lead to increased production and economic output. This, in turn, can boost an economy's economic growth and GDP output.
- Full employment also helps reduce poverty and income inequality by providing more people with stable incomes. Employment is a primary means of distributing income in the economy. Thus, by achieving a stable rate of unemployment, which does not spike inflation (the NAIRU), income inequality can be reduced.
- By achieving increased income equality, the objective of full employment can contribute to social cohesion and reduced crime rates.
What are the Challenges in Achieving Full Employment?
Despite the benefits, achieving full employment presents several challenges:
- Achieving full employment with rapid technological changes becomes difficult as automation and artificial intelligence reduce the demand for certain types of labour. For example, the OECD projects that by 2030, up to 46% of Australian jobs are at risk of being replaced by automation and AI.
- Economic cycles, including recessions and booms, influence employment levels. Achieving full employment requires managing these cycles effectively through appropriate policy measures. Recent trends display that Australia has been ineffective in doing so, as unemployment peaked at 7.4% in July 2020, due to the Covid-19 pandemic.
- Global competition can impact domestic employment, as companies move production to countries with lower labour costs. This comes as a result of increasing trends of globalisation, and transnational corporations.
What are Policies Used to Promote Full Employment?
Governments employ various strategies to achieve and maintain full employment:
Fiscal Policy
The use of fiscal policy allows governments to increase infrastructure spending, thus creating jobs. Additionally, they can provide tax incentives for businesses to hire more workers. For example, in response to an unemployment peak of 7.4% in July 2020, Australia's government implemented the JobMaker Hiring Credit scheme. In combination with other policies, this has helped reduce Australia's unemployment rate to 3.5% as of 2023.
Monetary Policy
Central banks' manipulation of monetary policy allows them to influence consumer interest rates to stimulate economic activity. This method, however, is very theoretical and subject to time implementation lags. As a result, it does not always help achieve full employment right away. For example, in 2020 the RBA's cash rate was set at an all-time low of 0.1%, while unemployment was 7.4%. However, the effects of this have not been seen until recently where the unemployment rate has started to drop (3.5% in 2023). Even then, this drop can't be attributed to monetary policy, as interest rates have hiked drastically over the last few years. However, this decrease in unemployment should be attributed to various successful fiscal policy programmes like JobKeeper.
Investment in Education and Training
Investing in education and training is essential for reducing structural unemployment by equipping workers with the skills needed in a changing economy. For example, Australia's Skills Package includes initiatives to provide training and apprenticeships, helping workers adapt to new industries and technologies.
Labour Market Reforms
A flexible labour market, with fewer regulations and barriers to hiring and firing, can help achieve full employment by allowing businesses to adjust their workforce according to economic conditions. This, in turn, helps address issues like underemployment and job security. For example, labour market reforms in Australia, such as changes to industrial relations laws, have aimed to increase flexibility and promote job creation.