Full employment definition

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

Chapter 11

11.1 Introduction and Aims

In Chapter 10, we discussed issues relating to labour market measurement. In this Chapter we will focus on theoretical concepts that underpin the measurement of economic activity in the labour market and the broader economy.

The Chapter has five main aims:

• To explain why mass unemployment arises and how it can be resolved.
• To develop the concept of full employment.
• To consider the relationship between unemployment and inflation – the so-called Phillips Curve.
• To develop a buffer stock framework for macroeconomic management (full employment and price stability) and compare and contrast the use of unemployment and employment as buffer stocks in this context.
• To more fully explore the concept of a Job Guarantee (employment buffer stock) approach to macroeconomic management.

[THIS JUST REPEATS THE INTRODUCTION FROM LAST WEEK TO SET THE CHAPTER MAP OUT – TODAY WE MOVE ON TO DISCUSS THE CONCEPT OF FULL EMPLOYMENT – LIKE ALL BOOK DRAFTING EXERCISES THE ORDER OF ARGUMENT EVOLVES AS ONE SETS ABOUT MAKING IT. IN THIS CASE, WE ALSO HAVE TO WORRY ABOUT PEDAGOGY AND THAT ADDS ANOTHER DIMENSION – SO THINGS MIGHT BE A LITTLE DIFFERENT ONCE THE FINAL DRAFT IS SET]

11.4 What is Full Employment?

In Chapter 1, we learned that a primary macroeconomic goal is full employment of labour resources. That goal was developed further in Chapter 10 The Labour Market where the full employment was related, at the macroeconomic level with the concept of the “efficiency frontier”.

An economy cannot be efficient if it is not using the resources available to it to the limit. The task of this Section is to outline in more specific terms what we mean by full employment. For example, does it mean zero unemployment? If some unemployment is consistent with full employment, what is the threshold beyond which we depart from full employment?

Given the discussion in Chapter 10 on underemployment and hidden unemployment, does the concept of full employment require there be no underemployment and no hidden unemployment? If so, then it extends beyond the concept of persons employed to embrace wider considerations of the hours of employment available.

Does the concept of full employment also take into account the quality of the job, which we considered to be a consideration as to whether a person was underemployed or not.

In this Section we will consider all these questions.

The concern about full employment was embodied in the policy frameworks and definitions of major institutions in most nations at the end of the Second World War. The challenge for each nation was how to turn its war-time economy, which had high rates of employment as a result of the prosecution of the war effort, into a peace-time economy, without sacrificing the high rates of labour utilisation.

The challenge and aspiration was articulated in the advanced nations in the immediate Post War period in the form of White Paper statements. A – White Paper – is consider to be major statements of policy purpose and indicate that the government intends to build a legislative and policy framework that will support the pursuit of the goals outlined.

In 1944, the British Government released its Economic Policy White Paper – which set the Post-War policy agenda that the government proposed.

Its opening statement is that:

The Government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war … A country will not suffer from mass unemployment so long as the total demand for its goods and services is maintained at a high level … Total expenditure on goods and services must be prevented from falling to a level where general unemployment appears.

Note that the intent was to maintain a high level of employment. It was left to the British economist William Beveridge to define what was meant by full employment.

His 1944 book – Full Employment in a Free Society – said that full employment (Page 18):

… means having always more vacant jobs than unemployed men, not slightly fewer jobs … It means that the jobs are at fair wages, of such a kind, and so located that the unemployed men can reasonably be expected to take them; it means, by consequence, that the normal lag between losing one job and finding another will be very short.

Today, we would express this in gender neutral terms but the intent would be the same.

Beveridge’s definition does not mean zero unemployment:

Full employment does not mean literally no unemployment, that is to say, it does not mean that every man and women in this country who is fit and free for work is employed productively on every day of his or her working life.

So he said that full employment would allow for no more than 3 per cent unemployment due to frictions but there always had to be more vacancies than unemployed workers.

In terms of the categories of unemployment we outlined in Section 11.1, Beveridge split his 3 per cent threshold into 1 per cent for seasonal factors, 1 per cent for frictional unemployment, and 1 per cent for variations in international trade, which disturbed the industrial composition of employment (some have said this is a form of structural unemployment).

But the important point is that these frictions would never mean that an unemployed worker was in that state for anything other than a very short period.

The Nobel Prize winning economist William Vickery said in 1993 that full employment is:

… a situation where there are at least as many job openings as there are persons seeking employment, probably calling for a rate of unemployment, as currently measured, of between 1 and 2 percent.

In terms of the time that was reasonable for a person to remain unemployed, he considered full employment meant that an unemployed person “can find work at a living wage within 48 hours”.

[Full reference: Vickrey, William, 1992. “Chock-Full Employment without Increased Inflation: A Proposal for Marketable Markup Warrants,” American Economic Review, American Economic Association, vol. 82(2), pages 341-45, May].

Who was responsible for maintaining full employment? Beveridge (1944: 123-135) said

The ultimate responsibility for seeing that outlay as a whole, taking public and private outlay together, is sufficient to set up a demand for all the labour seeking employment, must be taken by the State…

There were other major White Paper-type policy statements in advanced countries that followed the British White Paper and Beveridge’s book, which defined full employment as a fundamental aim of the national government.

The wording of these documents was clear – full employment required active government support to ensure that aggregate demand was sufficient to maintain employment opportunities for all those who desired to work.

It was recognised that the unemployment in the pre-war years was extremely wasteful and as the 1945 Australian White Paper on Full Employment noted:

It is true that war-time full employment has been accompanied by efforts and sacrifices and a curtailment of individual liberties which only the supreme emergency of war could justify; but it has shown up the wastes of unemployment in pre-war years, and it has taught us valuable lessons which we can apply to the problems of peace-time, when full employment must be achieved in ways consistent with a free society.

The importance of this historical context is to show that the concept of full employment that emerged in the Post-World War 2 period placed an The emphasis on jobs. There had to be more vacancies at living wages than there were unemployed persons looking for jobs. There might be a small proportion of willing workers moving between jobs but this dislocation would be very temporary.

From the end of the War until the mid-1970s, most advanced governments assumed this responsibility and they used monetary and fiscal policy to maintain levels of aggregate demand sufficient to ensure enough jobs were created to meet the demands of the labour force. Unemployment rates were usually very low in this period. In Australia, for example, the unemployment rate remained below 2 per cent for most of this period.

Figure 11.2 shows the movement in unemployment rates for Australia, the United Kingdom and the United States from 1950.

[BRIEF DISCUSSION ABOUT THIS DATA AND HOW THE CONCEPT OF FULL EMPLOYMENT MIGHT TRANSLATE INTO DIFFERENCE FULL EMPLOYMENT UNEMPLOYMENT RATES – THEN A DISCUSSION ABOUT CYCLES – WHICH WILL LEAD INTO THE THEORETICAL DEBATE AT THE END OF THIS CHAPTER – AND THE PERSISTENCE OF HIGHER UNEMPLOYMENT SINCE THE 1970s – LEADING TO A DISCUSSION LATER ABOUT THE ABANDONMENT OF THE WHITE PAPER COMMITMENTS]

Figure 11.2 Average unemployment rates for selected countries by decade

Source: XXXX

As we will see further on in this Chapter, the emphasis on there being sufficient jobs as a condition for full employment led to a robust debate about what constituted the irreducible minimum rate of unemployment. How much frictional unemployment was to be tolerated? What was a fair level of pay?

However, this emphasis gave way in the 1950s to a discussion about the so-called Phillips curve, which was an postulated relationship between unemployment and inflation. The definition of full employment became tied up in discussions about whether there was a trade-off between these twin evils (unemployment and inflation) and if so, what was the extent of that trade-off.

For our purposes, full employment was no longer debated in terms of a number of jobs. Instead it was defined as the rate of unemployment that was politically acceptable in the light of some accompanying inflation rate.

We will return to that debate later in the Chapter.

In our definition of full employment to date, we have only focused on the number of unfilled jobs on offer relative to the number of workers who are measured as being unemployed.

In Chapter 10, we learned that the unemployment rate is a narrow measure of labour underutilisation and in recent decades underemployment has become a significant problem in many countries.

A focus just on jobs ignores the hours-dimension of those jobs in relation to the preferences of the workers who occupy them. We have seen that underemployment is a form of unemployment in the sense that the worker is employed but would prefer to work more hours. The problem is not a lack of jobs on offer in this case but a lack of hours of work.

Should our definition of full employment take this shortage of hours on offer into account. Logically it should. The concept of full employment is about efficiency and an underemployed worker is being wasted just as an unemployed worker is being wasted. The consequences of the waste for the individual might vary – for example, at least the underemployed worker has an income – but from a macroeconomic perspective, the lack of working hours leads to foregone national income losses in the same way as joblessness reduces the national income produced.

The International Labour Organization (ILO) outlined the policy objective of full employment in their Employment Policy Convention (ILO No. 122), which was adopted by signatory nations in 1964.

The ILO say (Source) that:

According to this Convention, full employment ensures that (i) there is work for all persons who are willing to work and look for work; (ii) that such work is as productive as possible; and (iii) that they have the freedom to choose the employment and that each workers has all the possibilities to acquire the necessary skills to get the employment that most suits them and to use in this employment such skills and other qualifications that they possess. The situations which do not fulfil objective (i) refer to unemployment, and those that do not satisfy objectives (ii) or (iii) refer mainly to underemployment.

It is clear that our definition of full employment has to evolve to consider the broader ways in which capitalist societies waste the willing and available labour force.

The ILO clearly considers that full employment should require zero underemployment. That is not the same as saying that all employment should be full-time. As we learned in Chapter 10, the majority of part-time workers are content with the hours of work made available to them. However, a growing minority of part-time workers (up to 30 per cent in some nations) are not content and desire more hours of work.

What about hidden unemployment?

Conclusion

I had a day full of meetings today and have written slightly less than I planned as a consequence. Next week I will finish the discussion of definitions off and then move into the discussion about evolution of the Phillips Curve. Finally, the discussion will introduce involuntary unemployment and seek to answer why the unemployment rate moves as per the graph above.

That will introduce the theoretical debate – one of the biggest in macroeconomics – about real wage cut proposals.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.