Definitions [2]
Definition: Natural Employment
“The natural rate of unemployment is the rate of unemployment arising from normal labour market frictions that exist when the labour market is in equilibrium. Natural unemployment, refers to frictional unemployment and structural unemployment.” — Ruffin and Gregory
Definition: Full Employment
- “Full employment is a situation in which everyone who want to work is working except for those who frictionally and structurally unemployed.”
— Prof. Spencer
Key Points
Key Points: The Concept of Full Employment
- Full employment exists when all people willing to work at the prevailing wage rate are employed.
- It does not include voluntary unemployment (e.g., idle rich).
- Frictional unemployment (about 3–4%) due to job changes or structural shifts is normal.
- An economy is at full employment even with this natural rate of unemployment.
Key Points: Keynes's View on Full Employment
- Keynes argued that economies usually face underemployment, not full employment, due to deficiency of aggregate demand.
- Full employment does not mean zero unemployment; frictional and structural unemployment always exist (natural rate of unemployment).
- Employment is determined by effective demand, i.e., where aggregate demand equals aggregate supply (AD = AS).
- To achieve full employment, state intervention and increased investment are necessary.
