Definitions [4]
Definitions: Full Employment
- According to Lerner, “Full Employment is a situation in which all those who want to work at the existing rate of wage get work without any undue difficulty.” There is no “involuntary unemployment”.
- “Full employment is a situation in which everyone who want to work is working, except for those who frictionally and structurally unemployed.” — Prof. Spencer
- “Full employment is a level cemployment associated with a normal level of unemployment.”
Definition: Volume of Employment
According to Keynes, “The volume of employment is given by the point of intersection between the Aggregate Demand function and Aggregate Supply function.”
Definition: Frictional Unemployment
According to Gardner, “Frictional Unemployment is the unemployment associated with the changing of jobs in dynamic economy”.
Definition: Structural Unemployment
According to Gardner, “Structural unemployment is the unemployment that results from the long term decline of certain industries.”
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: Flexibility of Wages, Interests and Prices
- Flexible wages: Fall in money wages reduces real wages, increases demand for labour, and removes unemployment.
- Flexible interest rate: Fall in interest rate reduces saving and increases investment, restoring full employment.
- Flexible prices: Fall in prices raises real income and demand, increasing output and employment.
- Conclusion: Flexibility of wages, interest, and prices automatically ensures full employment in the economy.
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.
Key Points: Determination of Equilibrium Level of Income and Employment
- Equilibrium employment is determined where Aggregate Demand (AD) equals Aggregate Supply (AS).
- When AD > AS, producers increase output → employment rises.
- When AD < AS, producers reduce output → employment falls.
- Full employment is achieved only by increasing aggregate demand, mainly through higher investment; otherwise equilibrium may exist with unemployment (under-employment equilibrium).
Key Points: Important Terms of Employment and Unemployment
- Involuntary unemployment is when someone wants and is able to work but cannot find a job.
- Voluntary unemployment is by personal choice and not considered in economic unemployment rates.
- Full employment does not mean zero unemployment but the absence of involuntary unemployment.
