As the battle for the Labour party continues, incumbent leader Jeremy Corbyn and leadership contender Owen Smith have both pledged to bring about ‘full employment’.
But what is ‘full employment’? It is certainly not an unemployment rate of 0%. Also known as the ‘natural rate of unemployment’, full employment exists when nobody is unemployed as a result of poor macroeconomic conditions relating to the boom and bust of business cycles. Frictional unemployment (being temporarily between jobs) doesn’t count. Nor does structural unemployment (a mismatch of skills giving rise to long term unemployment).
With unemployment, a lower rate is not necessarily a better rate. When unemployment falls below this ‘natural’ rate, prices are driven up as the economy attempts to seek a balance with the jobs market. Employers bid up wages to attract increasingly scarce workers (putting up prices to pay for higher wage costs), whilst the now better paid workers spend more of their money (bidding up prices of goods and services). Attempting to drive unemployment below the ‘natural’ rate however politically rewarding this might seem would lead only to inflationary pressures.
For the UK, the rate of unemployment consistent with full employment has been estimated at 5.4% in 2015 by the Office for Budget Responsibility, and 6.9% in 2014 by the OECD. But with today’s release of labour market statistics by the Office for National Statistics giving the latest unemployment rate at 4.9%, we may already be in a state of full employment. Perhaps we should prioritise other economic goals.