Full employment is an economic situation in which there is no unemployment or no cyclical or deficient-demand unemployment.
The definition of full employment differs between economists. Full employment can entail the disappearance of all unemployment and a 100% employment-to-population ratio. For other economists full employment can occur even when structural and frictional unemployment remain. For instance, workers who are "between jobs" for short periods of time as they search for better employment are not counted against full employment, as such unemployment is frictional rather than cyclical. An economy with full employment might also have unemployment or underemployment where part-time workers cannot find jobs appropriate to their skill level, as such unemployment is considered structural rather than cyclical. Full employment marks the point past which expansionary fiscal and/or monetary policy cannot reduce unemployment any further without causing inflation.
Other economists view full unemployment as the unemployment rate at which inflation is stable. Advocacy of avoiding accelerating inflation is based on a theory centered on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) and those who hold it usually mean NAIRU when speaking of full employment. The NAIRU has also been described by Milton Friedman, among others, as the "natural" rate of unemployment. Such views tend to emphasize sustainability, noting that a government cannot sustain unemployment rates below the NAIRU forever: inflation will continue to grow so long as unemployment lies below the NAIRU.
For the United States, economist William T. Dickens found that full-employment unemployment rate varied a lot over time but equaled about 5.5 percent of the civilian labor force during the 2000s. Recently, economists have emphasized the idea that full employment represents a "range" of possible unemployment rates. For example, in 1999, in the United States, the Organisation for Economic Co-operation and Development (OECD) gives an estimate of the "full-employment unemployment rate" of 4 to 6.4%. This is the estimated unemployment rate at full employment, plus or minus the standard error of the estimate.
The concept of full employment of labor corresponds to the concept of potential output or potential real GDP and the long run aggregate supply (LRAS) curve. In neoclassical macroeconomics, the highest sustainable level of aggregate real GDP or "potential" is seen as corresponding to a vertical LRAS curve: any increase in the demand for real GDP can only lead to rising prices in the long run, while any increase in output is temporary.
Economic concept
What most 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. However, this was not Tobin's perspective in his later work.
Some see John Maynard Keynes as attacking the existence of rates of unemployment substantially above 0%:
Most readers would interpret this statement as referring to only cyclical, 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 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:
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: