9.3 Employment/unemployment

Full employment is the level of employment consistent with the economy’s normal or sustainable unemployment, so frictional and some structural unemployment may remain.

The term is a benchmark, not a claim that every person has a job immediately. It depends on definitions, labour-market matching, participation and the time horizon.

A worker changing jobs may be temporarily unemployed while the economy is at full employment; a recession that leaves many workers idle creates a negative output gap below the benchmark.

Full employment is not 100% employment, and a low unemployment rate can still hide inactivity, underemployment or poor job quality.

Equilibrium unemployment is consistent with the prevailing wage and labour-market structure: people are searching or changing jobs while vacancies and workers are being matched. Disequilibrium unemployment occurs when the wage or conditions prevent the quantity of labour supplied from matching demand.

A wage floor above the market-clearing level can create excess supply. A recession can also create unemployment through weak demand, even if wages could adjust.

A graduate between suitable offers may be equilibrium unemployment. A binding minimum wage that leaves more applicants than vacancies creates a disequilibrium gap in the simple model.

The labels are about the cause and adjustment mechanism, not whether the unemployed person is trying hard enough.

Voluntary unemployment refers to choosing not to accept available work at the prevailing terms; involuntary unemployment refers to being willing and able to work but unable to find a job at those terms.

The classification depends on the relevant wage, location, hours, skills and working conditions. A person refusing one unsuitable job is not automatically voluntary unemployed if no reasonable job is available.

A worker who rejects a vacancy far below their reservation wage may be described as voluntary under a simple model; a qualified worker seeking jobs at the prevailing wage but finding none is involuntarily unemployed.

“Voluntary” is not a moral judgement and cannot be inferred from a person’s unemployment alone; state the available alternative and the definition used.

The natural rate of unemployment is the rate consistent with stable inflation and normal labour-market matching, usually including frictional and structural unemployment but excluding cyclical unemployment.

It can change when skills, benefits, search technology, demographics, regulation or the structure of industries changes. It is estimated rather than directly observed and can move over time.

Better matching technology may reduce frictional unemployment and lower the natural rate; a permanent decline in a region’s main industry may raise structural unemployment and the rate.

Natural does not mean inevitable or desirable, and it is not the same as a fixed unemployment target or zero inflation in every model.

Employment trends describe how the number, type and quality of jobs change over time. They are shaped by labour-force participation, sectoral demand, technology, trade, demographics, institutions and the business cycle.

A fall in employment in one sector can coexist with overall employment growth if new sectors expand. Distinguish the number of jobs from hours, productivity, pay, security and who can access them.

Automation may reduce routine manufacturing jobs while raising demand for maintenance and design; the net employment effect depends on product demand, retraining and the speed of adjustment.

A rising employment rate does not prove every group benefits, and technological change is not automatically job-destroying or job-creating.

Geographical mobility is the ability to move between locations; occupational mobility is the ability to move between jobs or industries. Skills, housing, transport, family ties, immigration rules and information affect both.

High mobility helps labour markets match vacancies and can reduce structural unemployment, but moving has costs and may harm communities losing workers. Training raises occupational mobility only when it matches real opportunities.

A worker may be qualified for a vacancy but unable to relocate because housing is unaffordable; a short course may help occupational movement if employers recognise the skill.

Mobility is not simply willingness to move, and more mobility is not always socially costless or equally available to all workers.

Policies include demand management for cyclical unemployment, training and mobility support for structural unemployment, job-search services for frictional unemployment, and measures affecting participation or incentives.

Expansionary fiscal or monetary policy can raise employment when demand is weak but may cause inflation or debt. Supply-side measures take longer and may not help a recession caused by missing demand.

A recession may call for temporary demand support; a region losing its main industry may need retraining, transport and relocation support instead.

No unemployment policy works for every type, and reducing the measured rate by changing eligibility is not the same as creating productive jobs.