Goal of Full Employment

The goal of full Employment

Employment and unemployment

In every economy, the ‘household’ sector will provide labour resources to the ‘business, government and not for profit sectors.’ It typically involves an exchange between two consenting parties, the outcome of which sees labour input being exchanged for some form of income or reward. In this respect, employment is a key component of economic activity and provides the impetus for growth in the economy and improvements in living standards. While there are many examples of people being ‘employed’ in all manner of pursuits, the statistical definition of employment in Australia is quite specific. To be classified as ‘employed’ by the ABS, one needs to be over 15 years of age and working more than one hour per week in return for some form of measurable remuneration (such as wages). To be classified as ‘unemployed,’ one needs to be over 15, without work or working for less than one hour per week, and actively looking for (more) work. Based on these ABS definitions, there are countless examples of people who would consider themselves to be gainfully ‘employed,’ but may be considered unemployed (such as people working voluntarily for charities and simultaneously seeking paid employment). Similarly, there are numerous examples of people who perform valuable roles in society who are neither considered employed or unemployed, such as stay at home mothers or people caring for others with illnesses.

Definition of Full Employment

The ideal of every government in the world is to have a situation where every person that wanted a job could get one. However, with the possible exception of the BOOM years 1960’s and 1970’s, this ideal is rarely achieved. Full employment occurs when the level of unemployment is at its lowest possible level in terms of it being consistent with an economy that is growing at its maximum ‘sustainable’ rate. Full employment does not require that unemployment is zero because every economy will have some workers unemployed for various reasons (see below) at any time – even during Boom periods.

The definition of ‘full employment’ has changed over time. During the 1960’s and 1970’s full employment occurred when unemployment was 1-2%. As unemployment increased in the 1980’s the statistical definition of full employment also changed. Full employment has generally been regarded as that level of unemployment that exists when the government’s economic growth objective is achieved. It is generally accepted that the full employment objective involves the attainment of an unemployment rate of approximately 4.5% to 5.0%. This is sometimes referred to as the natural rate of unemployment or the Non Accelerating Inflation Rate of Unemployment (NAIRU).

Recent Commonwealth Treasury estimates have put the NAIRU at somewhere between this 4.5% – 5.0% range. A NAIRU of 4.5% would mean that any attempts to target unemployment rates below 4.5% are likely to stimulate inflation to unacceptable levels.

Why does unemployment exist when the economy is growing strongly?

  • structural unemployment – where the skills of the unemployed do not match the skills required by industry.  This essentially means that the structure of industry has changed or that a proportion of the working age population has not ensured they have the adequate education or training to secure jobs.  For example, microeconomic reforms forced firms to become more competitive, resulting in restructuring and redundancies (TCF and MV industries are prime examples, including Ford and Holden post 2013);
  • seasonal unemployment -occurs for some workers, but only at certain times of the year e.g. fruit pickers, ski instructors, etc;
  • frictional unemployment – where workers move from one job to another;  and
  • hard core unemployment – those unable to find a job due to mental/physical characteristics that cause repeated job rejections.

With the exception of structural unemployment, the government is restricted in its ability to reduce these types of unemployment. Accordingly, the main type of unemployment the government seeks to lower via policy instruments is cyclical unemployment. This occurs when the economy is not operating at its full capacity due to aggregate demand deficiencies (e.g. when an economy experiences an economic downturn, such as a recession).

The government seeks to reduce structural unemployment by instigating measures that improve the skills of those ‘structurally unemployed’. These measures might include expenditure on education, work for dole scheme and/or subsidies to employ those who are long term unemployed (more than one year).