Pangasinan State University

DEPARTMENT OF SOCIAL SCIENCE

Lingayen, Pangasinan

Econ 101: BASIC ECONOMICS with TAXATION and

AGRARIAN REFORM
Lecture Series No. 7
Full Employment as a Macroeconomic Goal

I. FULL EMPLOYMENT
A. Definition and Nature
-a condition of the national economy, where nearly all persons willing and able to work at the prevailing wages
and working conditions are able to do so
-the level of employment rates when there is no cyclical unemployment
-situation in which all available labor resources are being used in the most economically efficient way.
-Full employment embodies the highest amount of skilled and unskilled labor that could be employed within an
economy at any given time. The remaining unemployment is frictional.
-20th century British economist William Beveridge stated that an unemployment rate of 3% was full
employment. Other economists have provided estimates between 2% and 7%, depending on the country, time
period, and the various economists' political biases.
II. UNEMPLOYMENT
A. Definition and Nature
-unemployment occurs when a person is available to work and currently seeking work, but the person is
without work
-the prevalence of unemployment is usually measured using the unemployment rate, which is defined as the
percentage of those in the labor force who are unemployed
B. Types of Unemployment
1. Frictional unemployment
Frictional unemployment occurs when a worker moves from one job to another. While he
searches for a job he is experiencing frictional unemployment. This applies for fresh graduates looking
for employment as well. This is a productive part of the economy, increasing both the worker's long
term welfare and economic efficiency. It is a result of imperfect information in the labour market,
because if job seekers knew that they would be employed for a particular job vacancy, almost no time
would be lost in getting a new job, eliminating this form of unemployment.

2. Classical unemployment
Classical or real-wage unemployment occurs when real wages for a job are set above the
market-clearing level. This is often ascribed to government intervention, as with the minimum wage, or
labour unions.
3. Structural unemployment
Structural unemployment is caused by a mismatch between jobs offered by employers and
potential workers. This may pertain to geographical location, skills, and many other factors. If such a
mismatch exists, frictional unemployment is likely to be more significant as well.
For example, in the United States in the late 1990s there was a tech bubble, creating demand
for computer specialists. In 2000-2001 this bubble collapsed. A housing bubble soon formed, creating
demand for real estate workers, and many computer workers had to retrain to find employment.
4. Seasonal unemployment occurs when an occupation is not in demand at certain seasons.
5. Cyclical or Keynesian unemployment
Cyclical or Keynesian unemployment, also known as demand deficient unemployment, occurs
when there is not enough aggregate demand in the economy. This is caused by a business cycle
recession, and wages not falling to meet the equilibrium rate.
C. Costs of unemployment
1. Individual
a.

Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay
mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction.
b.
Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of selfesteem, leading to depression.
c.

Another cost for the unemployed is that the combination of unemployment, lack of financial
resources, and social responsibilities may push unemployed workers to take jobs that do not fit their
skills or allow them to use their talents.

d.

Unemployment can cause underemployment.

2. Society
a. An economy with high unemployment is not using all of the resources, i.e. labour, available to it. Since it
is operating below its production possibility frontier, it could have higher output if all the workforce were
usefully employed. However, there is a trade off between economic efficiency and unemployment: if the
frictionally unemployed accepted the first job they were offered, they would be likely to be operating at
below their skill level, reducing the economy's efficiency. It is estimated that, during the Great
Depression, unemployment due to sticky wages cost the US economy about $4 trillion
b. During a long period of unemployment, workers can lose their skills, causing a loss of human capital.
Being unemployed can also reduce the life expectancy of workers by about 7 years
c. High unemployment can encourage xenophobia and protectionism as workers fear that foreigners are
stealing their jobs. Efforts to preserve existing jobs of domestic and native workers include legal
barriers against "outsiders" who want jobs, obstacles to immigration, and/or tariffs and similar trade
barriers against foreign competitors.

d. Finally, a rising unemployment rate concentrates the oligopsony power of employers by increasing
competition amongst workers for scarce employment opportunities.
III. UNDEREMPLOYMENT
A. Definition and Nature
In economics, the term underemployment has three different distinct meanings and applications. While it is
related to unemployment, a situation in which a person who is searching for work cannot find a job, in the case
of underemployment, a person is working. All three of the definitions of "underemployment" involve
underutilization of labor that critics say is missed by most official (governmental agency) definitions and
measurements of unemployment.
The term can describe the employment of workers with high skill levels in low-wage jobs that do not require
such abilities, as in the case of a medical doctor who is driving a cab. A related kind of underemployment refers
to "involuntary part-time" workers. These are workers who could (and would like to) be working for a full workweek who can only find part-time work.
The term is also used in regional planning to describe regions where economic activity rates are unusually low,
due to a lack of job opportunities, training opportunities, or due to a lack of services such as childcare and
public transportation.
The third definition of underemployment describes the opposite phenomenon: "overstaffing" or "hidden
unemployment," the practice in which businesses or entire economies employ workers who are not fully
occupied---for example, workers currently not being used to produce goods or services due to legal or social
restrictions or because the work is highly seasonal.
Household Population 15 Years Old and Over by Employment Status
Jan 2000- Jan 2008
Period

Labor Force Participation

Rate (%)

Jan 2008
Jan 2007
Jan 2006
Jan 2005
Jan 2004
Jan 2003
Jan 2002
Jan 2001
Jan 2000

63.4
64.8
63.8
66.1
67.3
65.7
66.4
65.5
65.1

Prepared by:
RENATO ESPINOZA SALCEDO
Instructor

Employment
Rate (%)

Unemployment
Rate (%)

92.6
92.2
91.9
88.7
89.0
89.4
89.7
88.6
90.7

7.4
7.8
8.1
11.3
11.0
10.6
10.3
11.4
9.3

Underemployment Visible UnderRate (%)

employment Rate

18.9
21.5
21.3
16.1
17.5
16.1
15.9
16.9
21.2

10.4
10.4
10.8
10.8
49.4
11.7