The Debate Over Full Employment
While there will always be some debate as to what full employment means for our economy, most agree that a reduction in the unemployment rate seems like a good thing, as it is a good indicator of the state of the economy. Amongst the many varied definitions of full employment, one that is widely accepted is “the lowest rate of unemployment compatible with price stability; variously estimated at between 4 and 6 percent unemployment”. Even though full employment may seem ideal on the surface, it is important to remember that there may be other factors that might make you think otherwise. As there continues to be much debate about whether or not full employment should be our nation's goal, the one thing that remains constant is the unpredictability of the economy.
The following paragraphs discuss the arguments for, followed by the arguments against, striving for full employment. Keep in mind as you read these, I am not saying whether I agree or disagree with any of them, I am merely stating what the possible arguments are. To emphasize my lack of bias (in this piece), I flipped a coin (trust me) to see who would go first. The pro- full employment side won the coin toss, presenting their arguments in no particular order.
Want A Job? No Problem! - The Case For Full Employment
Pro Argument #1: Crime
Many would say that full employment had a broad positive impact in the U.S. in the late 1990’s when it was (nearly) attained. However, a not so obvious benefit, attributed by many to the near elimination of unemployment, was the reduction of the crime rate throughout the entire country. While economists and sociologists rarely speak about the same issues, full employment and its reduction of crime rates brought them closer together. While there are many reasons for the crime rate to decrease, such as larger police forces and an increase in crime prevention spending, improved labor markets in and of themselves can arguably contribute to reducing the crime rate. Full employment creates jobs at the lower end of the job market, thus allowing the unemployed a living wage, ultimately adding further to full employment. In effect, potential criminals are off of the streets in jobs that keep income at a level where it lessens the financial crunch that encourages street crime. Studies support the notion that employment and increased wages for people at the bottom end of the wage scale correlates very closely with declining street crimes. Similarly, studies also find that the crime rate fell during times of economic expansion, and increased when the economy retracted.
Pro Argument #2: Public Service Employment
Another concept, sometimes referred to as Employer of Last Resort (ELR), or in a more positive sounding way, Public Service Employment (PSE), describes a theory of how a national government can attain true full employment, i.e. zero unemployment, without spawning inflation. Zero unemployment in this context means that jobs are available for anyone who wants one, but the wage is set by the government. Anyone not willing to take the job at the government wage is considered voluntarily unemployed, and therefore not counted as unemployed.
There are many potential benefits associated with creating jobs for all who want them. For starters, the pure number of productive labor hours increases, thereby bolstering GDP. The jobs that can be created will fill a void in the public service sector, services that are needed by society but rarely seen. Examples include companions for senior citizens or disabled persons, teachers’ assistants, safety monitors for public areas, public maintenance, assistants at libraries or cultural centers, and environmental related jobs. As the jobs created by PSE will primarily focus on public sector concerns, the environmental and physical condition of the communities will likely improve. One would also expect a decrease in the social costs typically associated with unemployment, such as reductions in crime and both mental as well as physical health problems.
The mechanics of the PSE program would work such that the government would offer to employ all willing workers at a fixed rate that is set at around the minimum wage level. The key is to hire off the bottom, in order to keep a loose labor market, and not impinge on the private sector. By ensuring that the program only eliminates all involuntary unemployment and does not spend beyond that point, then aggregate demand is brought up to, but not beyond, the full employment level, and therefore price stability is maintained.
Financially, many believe that a PSE program will pay for itself, partly with the elimination of unemployment benefits and curtailment of other aid programs. Administratively, the infrastructures that are in place for the now defunct aid programs can run the PSE program. In contrast with the current system, which pays people not to work, and which increases aggregate demand without increasing aggregate supply, a PSE program will increase both aggregate demand and aggregate supply, thus protecting price stability.
Pro Argument #3: Income Inequality
Income inequality is characterized by the uneven distribution of income amongst a given population. This inequality in the United States is starkly seen by virtue of the fact that the richest 20% of the population get 50% of the income, while the poorest 20% get only 3%. Economists have several views regarding the factors that contribute to income inequality, and employment related matters are often at center stage. The common theme in these theories is that the workers at the bottom end of the workforce are the first to become unemployed or underemployed, thus widening the inequality gap.
Income inequality can be fueled by technological changes which tend to favor more highly skilled workers, thus displacing the less skilled workers. The less skilled workers might also lose their jobs due to outsourcing to lower-wage countries. There is also what is known as bumping down, which occurs when the total job market shrinks and the more skilled workers are retained, forcing out the less skilled workers.
Some of the employment related solutions for reducing the inequality include raising the minimum wage, targeting development in poorer areas, and creating programs to provide training and
Perfection Is Not As Good As It Sounds - The Case Against Full Employment
Con Argument #1: Inflation
Full employment programs are loaded with inflationary dangers. The government can exert a powerful influence on total expenditures adequate to provide full employment. However, the added expenditures may be diluted by inflation instead of absorbing the unemployed.
In a full employment scenario, the economy would not only be a seller’s market for consumer goods and services, but also for all products, final or intermediate, including the typical factors of production. The labor market, the real-estate market, as well as the share market would all become buoyant, raising the spirit of optimism in the general public, increasing the tendency to spend freely from current income as well as increasing debt, fueling inflation.
Con Argument #2: Elasticity
As the economy approaches full employment, the elasticity of demand would diminish. As long as there is unemployment, the supply curve would run along a somewhat horizontal line; but as the economy pushes towards full employment, the curve would soon tend to become more vertical. The rapidness of the change of the curve from horizontal to vertical would vary greatly with different commodities and industries. A gradual rise in slope would result in inflationary pressures on costs and prices that would be encountered long before full employment is reached. A situation in which supply curves for industries slope considerably upward before the point where full employment is reached could result in a bust before boom. Before reaching the peak of the boom, businesses would be pushed beyond the optimal point for factors like plant and equipment, and the least efficient part of the labor force would be the last to be employed, contributing to overall inefficiency. It would therefore become necessary for both the private and public sectors to train the less efficient members of the labor force. In a nutshell, the productivity of the economy would decline considerably as full employment is approached.
Con Argument #3: Effects on Labor and Wages
Unemployment is often seen as a normal outcome of capitalist economies. Full employment indicates efficient use of labor and resources in the economy, putting upward pressure on wages, increasing the
Con Argument #4: The Argument for Unemployment
Another way to think about arguments against full employment is to think about arguments for unemployment. Some theorize that unemployment serves to discipline the working class, who otherwise may not fear being laid off in an environment of full employment. It may also be argued that unemployment helps to hold down wages, and hence inflation, by decreasing workers’ bargaining power.
You be the judge…
Again, my goal here is to merely lay out some arguments on both sides of the debate, and hopefully prompt some meaningful discussion. As with anything else, it is up to you to decide which side you are in favor of, and then do whatever you are willing and able to do to push in that direction.