Full Employment Flashcards
What is the definition of Full Employment?
Full employment is the level of employment at which all available labor resources are being utilized efficiently.
It does not mean zero unemployment but rather the lowest sustainable level of unemployment.
What type of unemployment is absent at Full Employment?
Cyclical Unemployment
The economy operates at full capacity, with no demand-deficient unemployment caused by recessions.
What is the Natural Rate of Unemployment (NRU)?
The lowest sustainable level of unemployment where only frictional and structural unemployment exist.
Some level of unemployment remains due to job transitions and skill mismatches.
What are the two main types of unemployment that exist at the NRU?
- Frictional Unemployment
- Structural Unemployment
Frictional unemployment is short-term due to job transitions, while structural unemployment is due to a mismatch between skills and available jobs.
What does Labor Market Equilibrium signify?
The number of job seekers matches the number of available jobs at prevailing wage rates.
What is Potential Output (Y*) in the context of Full Employment?
The economy’s maximum productive potential without causing excessive inflation.
What happens if employment exceeds the full employment level?
Labor shortages increase wages, leading firms to raise prices, causing demand-pull inflation.
What does NAIRU stand for?
Non-Accelerating Inflation Rate of Unemployment.
What is the significance of NAIRU in economic policy?
Policymakers use monetary policy to maintain unemployment close to NAIRU.
What is the graphical representation of Full Employment in the Classical Model?
LRAS (Long-Run Aggregate Supply) is vertical at full employment.
What occurs if Aggregate Demand (AD) increases beyond the full employment point in the Classical Model?
It leads to inflation, not real GDP growth.
Describe the AS curve in the Keynesian Model at Full Employment.
The AS curve is upward sloping, with a steep section at full employment.
What happens to GDP before reaching Full Employment in the Keynesian Model?
Increases in AD raise GDP significantly.
What is the outcome of further AD growth at Full Employment in the Keynesian Model?
It mainly causes inflation.
In the Aggregate Labour Market graph, what do the X and Y axes represent?
X axis is Employment and Y axis is Real Wage rate.
What does the intersection of ALS and ALD represent?
The point of full employment.
What is the free-market definition of full employment?
Full employment occurs where the labor market clears – all workers willing to work at market wages are employed
Remaining unemployment is voluntary.
According to Beveridge’s definition, what characterizes full employment?
A situation where job vacancies exceed unemployed workers, with frictional unemployment being short-term and minimal
Government must actively stimulate demand to maintain full employment.
What is the maximum unemployment percentage suggested by Beveridge for full employment?
No more than 3% unemployment
This comprises 1% frictional, 1% structural, and 1% seasonal unemployment.
What are the types of unemployment included in Beveridge’s definition of full employment?
- 1% Frictional
- 1% Structural
- 1% Seasonal
These categories should not exceed a total of 3% for full employment.
What does the Phillips Curve illustrate in the short run?
An inverse relationship between inflation and unemployment
This suggests that lower unemployment can lead to higher inflation.
What is the Long-Run Phillips Curve’s relationship with NAIRU?
It is vertical at NAIRU
Attempts to push unemployment below NAIRU cause accelerating inflation.
True or False: Beveridge advocated for government intervention to sustain full employment.
True
Government action is necessary to maintain demand in the labor market.
What is the aim of Demand-Side Policies in the Keynesian Approach?
Stimulate AD to reduce unemployment.
AD stands for Aggregate Demand.
What fiscal policy measures are used to boost demand?
Higher government spending and tax cuts.
These measures aim to increase consumer and business spending.
How does monetary policy aim to reduce unemployment?
By lowering interest rates to encourage investment and hiring.
Lower interest rates make borrowing cheaper, which can stimulate economic activity.
What are the risks associated with Demand-Side Policies?
Overheating the economy can lead to inflation.
Inflation can erode purchasing power and destabilize the economy.
What is the aim of Supply-Side Policies in the Classical Approach?
Improve labor market efficiency.
Efficiency in the labor market can lead to better job matches and higher employment.
What role does education and training play in Supply-Side Policies?
Reducing skill mismatches.
Skill mismatches occur when workers do not have the skills needed for available jobs.
What are labor mobility incentives in the context of Supply-Side Policies?
Addressing regional unemployment.
These incentives encourage workers to move to areas with more job opportunities.
How do Supply-Side Policies aim to reduce market rigidities?
By reforming minimum wage laws and employment regulations.
Reducing rigidities can make it easier for businesses to hire and adjust to market conditions.
What is a potential risk of Supply-Side Policies?
Policies may take time to impact employment.
Changes in education and regulation may not yield immediate results.
What was the aim of the UK post-WWII economy?
Full employment through intervention and collective bargaining
This aimed to stabilize the economy following the war.
Why was wage control important in the UK post-WWII economy?
To prevent inflation, as wages form the largest share of both costs and income
Wage control was essential to maintain economic stability.
What role did trade unions play in the context of full employment in the UK?
Full employment gave unions greater bargaining power, risking economic stability
Unions could push wages up too much, leading to cost-push inflation.
What was the policy dilemma regarding wage negotiations in the UK post-WWII?
Whether governments should intervene in wage negotiations or let market forces dictate wages
This dilemma reflects the tension between government control and free market principles.
What was a key success of the UK post-WWII employment policy?
Maintained lower unemployment rates than other Western economies
This suggests effective management of the post-war economy.
What is a key implication of the full employment policy?
Full employment does not guarantee price stability; wage and productivity policies are crucial
This highlights the complexity of economic management.
What might be necessary to prevent inflationary pressures during full employment?
Government intervention in collective bargaining
This indicates a proactive approach to economic policy.
What was the unexpected employment rate in the UK by 2015?
Surpassed 74%, exceeding expectations
This was notable considering the aftermath of the financial crisis.
How did rising employment impact living standards in the UK post-2015?
Offset weak wage growth and reductions in working-age state support
This was crucial for maintaining household living standards.
What was the impact of employment growth on inequality in the UK during the 2010s?
Strongest among lower-income households, reducing post-crisis inequality
This indicates a positive trend towards economic equality.
What was the result for lower-income households during and after the crisis?
Incomes fell less during the crisis and recovered faster afterward
This showcases resilience among lower-income groups.
What are two major factors changing job structures and challenging full employment?
Globalisation and Automation
The rise of automation and global competition are altering the nature of jobs available.
What policy innovations may be necessary to ensure full employment in the future?
Universal Basic Income (UBI), job guarantees, retraining programs
These policies aim to address the evolving labor market conditions.
True or False: Automation is a factor that could potentially hinder full employment.
True
Automation may reduce the number of available jobs in certain sectors.
Fill in the blank: Policies such as _______ may be necessary to address changing labor market conditions.
Universal Basic Income (UBI)
UBI is one of the proposed solutions to support individuals in a changing job market.
What challenges does global competition pose for full employment?
Changing job structures
Global competition can lead to job displacement and require workforce adaptation.
