What is Full Employment? How Should We Look at It?

What is Full Employment? How Should We Look at It?

By: Daniel Steingold | July 03, 2016

Full employment, despite its name, does not imply a state in which every individual in a given country or region is employed.

Rather, it has a more flexible definition: according to Investopedia, it “is an economic situation in which all available labor resources are being used in the most efficient way possible.”

They go on to elaborate: “Full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time. Any remaining unemployment is considered to be frictional, structural or voluntary.”

In other words, full employment is the best realistic rate of unemployment that a nation can have. No economy can ensure that every single person has a job.

In the U.S., the Federal Reserve has openly called for reaching its own measure of full employment, which they deem an unemployment rate of 4.9 percent or less.

Much was made in the media about this rate having been reached this past January. (By May, the rate had further slipped to 4.7 percent.)

This post will address many of the major aspects behind full employment: its history, what it really denotes, and whether is it a good marker for measuring the strength of the job market.

History of Full Employment in the United States

According to the Bureau of Labor Statistics (BLS), the U.S. has had relatively few periods of what they would term “full employment” in the past decade.

The entire year of 2006 saw unemployment rates lower than 4.9 percent— rates were stable, ranging from 4.8 percent in February to 4.4 percent in December.

2007 also had mostly low unemployment rates, with every month but December (at an even five percent) posting unemployment rates no higher than 4.7 percent.

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By the end of 2008, unemployment rates in the U.S. had skyrocketed to 7.3 percent. Unemployment rates would reach even more precarious levels over the following years; April 2010 would see a 9.9 percent unemployment rate, while the previous October hit the double digit mark at an even 10 percent.

It wasn’t until October 2014 that unemployment reached under six percent. Throughout 2015, unemployment was no higher than 5.7 percent.

Although it is not the main point of this post, even lower levels of unemployment have been reached further in the past. In 1968 and 1969, for example, no month exceeded 3.8 percent unemployment.

(With this being said, ten consecutive months spanning from late-1982 to mid-1983 saw unemployment rates exceeding 10 percent. They tapered off to 8.3 percent by the end of 1983.)

It is clear that the U.S. believes that current rates of employment cannot be improved significantly, at least not in a practical or efficient way.

What Full Employment Really Means

While full employment generally does signal that an economy isn’t doing poorly, it doesn’t paint the full picture.

There at least two concepts— one of which has been discussed ad nauseam on this blog— that explain why full employment isn’t all it’s touted to be: underemployment and workforce participation rate.

Underemployment is simply a term used to refer to those who don’t get enough hours at their job. Part-time employment has become increasingly commonplace, regardless of whether an employee is looking for it— unwilling part-time workers still count as being employed in official government statistics.

A recent Gallup poll showed that in May 2016, 13.7 percent of Americans were underemployed. While this is a full one percent drop from the 14.7 percent of underemployed individuals in May 2015, knowledge of this metric makes the official 4.7 percent unemployment rate look less encouraging.

As for the workforce participation rate, it is important to note that unemployment rates only look at individuals who either have a job or are actively seeking a job. The workforce participation rate measures the percentage of able civilians aged 16-to-64 who are either employed or unemployed and looking for work.

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In May 2016, the workforce participation rate was only 62.6 percent, which was seen to remarkably low. Not only were a record nearly 95,000,000 adults out of the workforce, but the percentage of those in the workforce almost matched a 38-year low.

The number of individuals leaving the workforce during President Obama’s tenure has increased by over 14 million.

While it should be noted that certain older and younger individuals should not necessarily be expected to be in the workforce, this misses a larger point: there are a significant number of Americans who have simply given up on finding a job, and are not part of official unemployment statistics.

(It should be mentioned that certain groups, including students, homemakers, institutionalized individuals, non-civilians, and retired individuals under the age of 64 are typically not counted in the labor force participation rate.)

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All in all, a low unemployment rate does not signal full employment under its textbook definition. Ask those who have given up on the job search if they feel like their decision has been voluntary, or if their skills have been “used in the most efficient way possible.”

Should We Even Strive for Full Employment?

This question, as simple as it is, can be answered both yes and no.

Looking to have as many able-bodied individuals working as possible in the economy is undoubtedly a good thing. More employment generally leads to both a better level of lifestyle for the individual, and a better overall economy for the nation.

Trying, however, to reach the benchmark that the Fed has set for full employment, without taking into regard any employment metrics other than the unemployment rate, would be foolish.

In a speech to the United States Joint Economic Committee last year, Elisabeth Jacobs, the Senior Director at the Washington Center for Equitable Growth, praised the Obama administration for its recovery from the Great Recession. She particularly highlighted an unprecedented 64 straight months of growth in private sector job creation, along with over five years of decline in joblessness.

Jacobs, however, also emphasized how other looking at other measures of unemployment, such as the employment-to-population ratio— which is closely related to the labor force participation rate— can illustrate a more accurate representation of the economy.

She highlighted that the employment-to-population ratio, in particular, sat 3.4 percentage points below what it was pre-Recession. The prime-age employment ratio, which looks at the share of the population between 25 and 54 that is employed, has also declined by 2.5 percent.

Jacobs makes a few other observations about the economic state we’re in today— and how we got here.

She points out that the labor force participation rate has not grown much at all since the turn of the millennium, and she has two culprits: baby boomers and younger workers. Although not always counted in official rates, many end up being so.

Her ultimate point is that the economy undergoes cycles— booms and busts. There is nothing we can do to absolutely prevent the damage of downturns in the economy, although smart economic policies help.

Although not a popular notion, she does acknowledge that many welfare programs, including Social Security, can discourage work amongst older individuals. Even Obamacare has its flaws in the job economy, as it discourages companies from hiring full-time.

Ultimately, achieving the much ballyhooed goal of “full employment” is a great step on the way to a strong economy, but it shouldn’t be the only thing for which any nation strives in terms of jobs.

We need to focus not only on other metrics— like the labor force participation rate and underemployment— but make sure that we are properly preparing our workforce in terms of education for the job market of the future.

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If we don’t address what could be impending perils to a healthy job economy— automation, the proliferation of the gig economy.

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