Full employment: what is it and can it happen?

At the start of this year Prime Minister David Cameron set a goal of full employment. But what is full employment and how is it measured? Whilst a literal interpretation would imply everyone having a job, actual measures of full employment normally refer to a level of employment or unemployment, where those looking for work are able to find it.

Highest employment rate in the G7

The Prime Minister’s full employment goal refers to an earlier aim, set by the Chancellor in March 2014, of having the highest employment rate of any G7 country. Even though the UK has not achieved the highest G7 employment rate in recent years, for much of the 2000s there was little difference between the top three of UK, USA and Canada. According to the most recent OECD data the UK ranked fourth of the G7 countries, in the third quarter of 2014.

Employment 1

80% employment

This is not the first attempt to define a full employment target. A 2007 Department for Work and Pensions report aimed for an employment rate above 80% in the long-term. The UK employment rate had previously reached a high of 73.2% in 2005 and is currently 73.0%.

Europe 2020: 75% of population age 20-64

The EU’s Europe 2020 strategy includes a commitment to achieve full employment by 2020, defining it as an employment rate of 75% for 20-64 year olds. Not only did the UK achieve full employment by this measure in the mid-2000s, but it has also had full employment since mid-2013.

More vacant jobs than unemployed people

Not only can full employment be defined in terms of a high employment rate, it can also be defined in terms of a low rate of unemployment.

William Beveridge’s 1944 book Full Employment in a Free Society defined this as meaning “that there are always more vacant jobs than men seeking jobs – as meaning further that the jobs are of a kind and so located that unemployment is reduced to short intervals of standing by”. The UK has not achieved this definition of full employment in recent decades and the latest data shows there are 2.8 unemployed people for every vacancy.

Lowest unemployment rate in the G7

Turning the Prime Minister’s goal on its head, the UK could aim for the lowest unemployment rate of any G7 country; a position held by Japan since the end of 2004. As with the employment measure, the UK currently sits in the middle at fourth lowest in the G7; but did enjoy periods in the early 2000s of having the G7’s lowest unemployment rate.

An unemployment rate below 5%

William Beveridge also suggested that unemployment should be reduced to a level of not more than 3% and for much of the 1950s and 1960s the UK unemployment rate was below 3%. However the measure of unemployment used by Beveridge is different to that which is used today. More recently Nicholas Sarkozy was elected President of France in 2007 with a pledge to secure full employment in France by 2012, meaning unemployment below 5%. Unemployment rates were below 5% in the UK for much of the 1970s and again in the mid-2000s.

NAIRU

A more theoretical concept of full employment, often used by economists, is the Non-Acceleration Inflation Rate of Unemployment (NAIRU). The NAIRU is the lowest possible unemployment rate which does not cause pressure on prices, increasing the current rate of inflation. The OECD produces estimates of the NAIRU and there have been several instances in the UK where unemployment was below this rate since the 1970s. The Bank of England and Office of Budget Responsibility have also produced estimates of the NAIRU.

Has the UK ever achieved full employment?

The chart below shows periods where the UK has achieved full employment according to different measures. The most recent period with a number of measures pointing to full employment was the early to mid-2000s.

Employment 2

 

James Mirza Davies