Editing Full employment (section)

== Economic concept ==
What most [[neoclassical economics|neoclassical economists]] mean by "full" employment is a rate somewhat less than 100% employment. Others, such as the late [[James Tobin]], have been accused of disagreeing, considering full employment as 0% unemployment.<ref>"As a young professor I did a paper where I analyzed the optimal unemployment rate," said [[Joseph Stiglitz]], a professor at [[Columbia University]] in New York, who knew Tobin at [[Yale University|Yale]]. "Tobin went livid over the idea. To him the optimal unemployment rate was zero."
[https://www.bloomberg.com/apps/news?pid=20601109&sid=ajz1hV_afuSQ Yale's Tobin Guides Obama From Grave as Friedman Is Eclipsed]</ref> However, this was not Tobin's perspective in his later work.<ref>See, for example, "Inflation and Unemployment" by James Tobin, ''The American Economic Review'', Vol. 62, No. 1/2 (Mar. 1, 1972), pp. 1-18.</ref>

Some see [[John Maynard Keynes]] as attacking the existence of rates of unemployment substantially above 0%:
:"The Conservative belief that there is some law of nature which prevents men from being employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts… Our main task, therefore, will be to confirm the reader's instinct that what seems sensible is sensible, and what seems nonsense is nonsense." – J. M. Keynes and [[H. D. Henderson]] in a pamphlet to support [[Lloyd George]] in the 1929 election.<ref>{{cite book|last1=Keynes|first1=J. M.|author-link1=John Maynard Keynes|last2=Henderson|first2=H. D.|author-link2=Hubert Henderson|title=Can Lloyd George Do It? The Pledge Examined|year=1929|publisher=The Nation and Athenæum|location=London|pages=10–11|chapter=II: The Common Sense of the Problem}}</ref>

Most readers would interpret this statement as referring to only cyclical, [[cyclical unemployment|deficient-demand]], or "involuntary unemployment" (discussed below) but not to unemployment existing as "full employment" (mismatch and frictional unemployment). This is because, writing in 1929, Keynes was discussing a period in which the unemployment rate had been persistently above most conceptions of what corresponds to full employment. That is, a situation where a tenth of the population (and thus a larger percentage of the [[labor force]]) is unemployed involves a disaster.

One major difference between Keynes and the [[Classical economics|Classical economists]] was that while the latter saw "full employment" as the normal state of affairs with a free-market economy (except for short periods of adjustment), Keynes saw the possibility of persistent aggregate-demand failure causing unemployment rates to exceed those corresponding to full employment. Put differently, while Classical economists saw all unemployment as "voluntary", Keynes saw the possibility that [[involuntary unemployment]] can exist when the demand for final products is low compared to potential output.
This can be seen in his later and more serious work. In his ''General Theory of Employment, Interest, and Money'', chapter 2, he used a definition that should be familiar to modern macroeconomics:
:This state of affairs we shall describe as "full" employment, both "frictional" and "voluntary" unemployment being consistent with "full" employment thus defined.<ref name="johnmaynardkeynes">{{cite web |url=http://www.marxists.org/reference/subject/economics/keynes/general-theory/ |title=The General Theory of Employment, Interest and Money |author=John Maynard Keynes}}</ref>
The only difference from the usual definitions is that, as discussed below, most economists would add skill/location mismatch or [[structural unemployment]] as existing at full employment. More theoretically, Keynes had two main definitions of full employment, which he saw as equivalent. His first main definition of full employment involves the absence of "involuntary" unemployment:

: the equality of the real wage to the marginal disutility of employment ... realistically interpreted, corresponds to the absence of "involuntary" unemployment.<ref name="johnmaynardkeynes"/>

Put another way, the full employment and the absence of involuntary unemployment correspond to the case where the real wage equals the marginal cost to workers of supplying labor for hire on the market (the "marginal disutility of employment"). That is, the real wage rate and the amount of employment correspond to a point on the aggregate supply curve of labor that is assumed to exist. In contrast, a situation with less than full employment and thus involuntary unemployment would have the real wage above the supply price of labor. That is, the employment situation corresponds to a point above and to the left of the aggregate supply curve of labor: the real wage would be above the point on the aggregate supply curve of labor at the current level of employment; alternatively, the level of employment would be below the point on that supply curve at the current real wage.

Second, in chapter 3, Keynes saw full employment as a situation where "a further increase in the value of the effective demand will no longer be accompanied by any increase in output."
: In the previous chapter we have given a definition of full employment in terms of the behavior of labor. An alternative, though equivalent, criterion is that at which we have now arrived, namely a situation, in which aggregate employment is inelastic in response to an increase in the effective demand for its output.<ref name="johnmaynardkeynes"/>

This means that at and above full employment, any increase in aggregate demand and employment corresponds primarily to increases in prices rather than output. Thus, full employment of labor corresponds to potential output.

Whilst full employment is often an aim for an economy, most economists see it as more beneficial to have some level of unemployment, especially of the frictional sort. In theory, this keeps the labor market flexible, allowing room for new innovations and investment. As in the NAIRU theory, the existence of some unemployment is required to avoid accelerating inflation.

=== Uncertainty ===
{{Unreferenced section|date=September 2020}}
Whatever the definition of full employment, it is difficult to discover exactly what unemployment rate it corresponds to. In the United States, for example, the economy saw stable inflation ''despite'' low unemployment during the late 1990s, contradicting most economists' estimates of the NAIRU.

The idea that the full-employment unemployment rate (NAIRU) is not a unique number has been seen in recent empirical research. Staiger, Stock, and Watson found that the range of possible values of the NAIRU (from 4.3 to 7.3% unemployment) was too large to be useful to macroeconomic policy-makers. [[Robert Eisner]] suggested that for 1956–1995 there was a zone from about 5% to about 10% unemployment between the low-unemployment realm of accelerating inflation and the high-unemployment realm of [[disinflation]]. In between, he found that inflation falls with falling unemployment.