Question

1. What does the term Full Employment mean? Why do economists calculate it? How does it differ from the Natural Rate of Unemployment?

Answer 1

Ans: Full employment is a situation in the economy where everyone who is willing and able to work at the prevailing wage rate is able to get a job. It takes into account all those people who are willing to work at prevailing wage rate; it does not include those who are not ready to work at the wage rate of market; full unemployment does not imply zero rate of unemployment because there will always be some frictional unemployment exists in the economy because there will always be some people who are moving out of one sector to another in search of the job according to their skills; people take time to find job which is most suitable to them. Full employment includes frictional unemployment and structural unemployment which exists due to switching of jobs by the people and structural changes in economy

Full employment helps the economist to understand whether the economy is operating at its full capacity or not because if it is at fll employment it will not be possible to increase real GDP by increasing the resources; optimum utilisation of resources is occuring or not is told by full employment level. If the demand increases due to any reason like government policy or investment increases over and above the full employment level then it only results in the inflation;because all the resources are fully utilised and the changes in demand levelarereflected in price levels. Full employment level helps us to understand the operating capacity; at that level there is no demand deficient unemployment.

Natural rate of unemployment can be linked to rate of inflation; it is a nominal variable. It is Keynesian economics concept whereas full employment is a Classical concept. Natural rate of unemployment is a long run variable which the economies try to reach in the long run and to achieve the desired level of output. Basically natural rate of unemployment is an approximation to know about the full employment level, natural unemployment rate is calculated taking into mind the inflation rate in the long run and the natural output level in long run. Thus natural rate of unemployment is calculated and thus it is compared with actual unemployment rate to see whether the economy is at full employment level.