6.7: Full Employment

If you were appointed the Supreme Economist of the World and asked to devise an economic strategy to achieve a target unemployment rate, what would that target rate be? Would it be 3%? Or would it be 2%? What the heck, you’re the Supreme Economist of the World, why don’t you shoot for a 0% u-rate! Well, as the world’s top economist you should know that a target u-rate of 0% makes little sense.

It may surprise some to realize that there are different types of unemployment and some can even be considered beneficial to the economy! Right now, you might be asking yourself, “How can unemployment be considered good for the economy?” Well, let’s categorically examine unemployment.

Type of Unemployment	Example
Frictional: Brief periods of unemployment experienced by workers moving between jobs. Frictional unemployment is a characteristic of a healthy economy. The nation’s labor force productivity is enhanced when workers voluntarily leave their jobs to find work with requirements that better fit their skill set.	A retail salesclerk, who has paid her own way through law school, quits her job after graduation so she can find work as a lawyer.
Seasonal: Unemployment attributable to seasonal changes in employment or labor supply.	A construction worker is laid off during the winter months due to inclement weather.
Cyclical: Unemployment due to a lack of job vacancies (i.e., inadequate level of economic activity). The unemployment that plagued the U.S. during the 1930’s (The Great Depression Era) was primarily cyclical. As the economy shrank, so did the number of available jobs.	Ten highly skilled and qualified applicants vie for one job opening.
Structural: Unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs. Due to deep cuts in defense spending in the late 1980’s, structural unemployment hit workers in the defense industry hard (especially in Southern California). Highly skilled people in the weapons manufacturing and aerospace industries soon discovered, after being laid off, that their skills weren’t immediately applicable in nondefense industries.	A steel worker, laid off work after 25 years of exemplary service, cannot find work in the industries with job vacancies (e.g., computer software, biotechnology, etc.).

A significant limitation of the national u-rate is the fact that very little can be revealed about the type of unemployment the nation is experiencing by simply looking at the overall percentage.

Natural Rate of Unemployment

An economy reaches full employment when the only types of unemployment are frictional and seasonal. This rate of unemployment is sometimes called the “natural” rate. One way of determining the natural rate of unemployment is to have an eye on the price level (i.e., inflation) as the u-rate falls. As the economy approaches its full production capabilities, labor and other resources become increasingly scarce. And as businesses bid for the remaining resources, wages and prices would start to rise (figure 1 illustrates how higher prices paid in the input markets lead to higher prices paid in the product markets). Therefore, rising prices can be used as a signal that unemployment is nearing the natural rate.

Of Interest: This relationship between inflation and unemployment is graphically illustrated by the famous Phillips Curve. For more information on the Phillips Curve and how the late 1990s changed how many people think about the link between the u-rate and inflation, go to: What Happened to the Phillips Curve? and/or New Evidence on the Old Phillips Curve (the second article is an “easier read” than the first)

What is the natural rate of unemployment (sometimes referred to as the Non-Accelerating Inflation Rate of Unemployment [NAIRU])? No one really knows the precise percentage. In the 1980’s and early 1990’s the natural rate was thought to be between 5 and 6.5 percent. But that estimation changed when, in the late 1990’s, the u-rate fell below 4 percent and there was no significant increase in the inflation rate. Today, most economists will place the natural rate of unemployment somewhere around 5 percent.

Of Interest: Number of Jobs Held in a Lifetime

The natural rate of unemployment isn’t the only aspect of the employment situation that changes over time. Increasing globalization, changing demographics, and advancing technology are just a few examples of dynamic factors that alter employment patterns. The BLS continuously monitors job data for changes in long-term employment trends. For example, a recent BLS press release examined the number of jobs workers had between ages 18 and 42. The title of the report is "Number of Jobs Held, Labor Market Activity, and Earning Growth among Younger Baby Boomers." A copy of this report is available on the BLS Web site. http://www.bls.gov/news.release/pdf/nlsoy.pdf

The people in this survey held an average of 10.8 jobs between ages 18 and 42, although some people held more jobs than average and others held fewer jobs. On average, men held 11.0 jobs and women held 10.6. One drawback to this survey is that it does not reflect the labor market behavior of people who are not in that particular cohort--that is, people who are older or younger than the survey participants or who immigrated to the United States after the survey began in 1979. This is an important point to remember because job-changing behavior undoubtedly slows down for most people as they get older and settle into careers that suit them.

Figure 7

A Brookings Papers on Economic Activity article by Crump, Eusepi, and Giannoni, examines the relationship between the actual unemployment rate and the natural unemployment rate over time (see figure 7). The authors estimate the natural rate by linking inflation expectations with the unemployment gap (the difference between the actual unemployment rate and the natural rate of unemployment). Historically, the natural rate peaked above 7% in the early 1980s before steadily declining, remaining relatively stable between 4.5% and 5.5% from the 1990s to the Great Recession. During the recession, the actual unemployment rate spiked significantly above the natural rate, but as the economy recovered, it gradually declined to align with its long-run trend. By 2018, the estimated natural rate was 3.8%, with a confidence interval ranging from 3.4% to 4.5%, indicating some uncertainty but suggesting a continued downward trend.

News Alert

Job losses mount in 2009

John Smith

Job losses continued to mount in March and unemployment hit a 25-year high, according to the Bureau of Labor Statistics.

Employers cut 663,000 jobs from their payrolls last month, roughly in line with the consensus forecast of a loss of 658,000 jobs.

The continued job losses and lack of employment opportunities are starting to take a significant toll on people around the country. The negative effects are felt with great intensity in cities like Atlanta. The lack of job openings has caused the average time for a job seeker to find a job to increase to 30 weeks.

Economists predict that between 600,000 and 700,000 more jobs will be lost in April, and that the best people can hope for is that the pace of job losses starts to slow down heading into summer.

Which type of unemployment best describes the situation in Atlanta?

1. Frictional
2. Cyclical
3. Seasonal
4. Structural

Explanation: Cyclical unemployment occurs when there are too many job seekers vying for too few job openings. This best describes the situation in Atlanta because long-term unemployment was due to a lack of job openings.