In principle, full employment exists when all resources (especially labor) are fully engaged in the production of goods and services, that is, full employment puts the economy ON the production possibilities frontier. However, in practice and in terms of macroeconomic policy, full employment is best viewed as the condition that exists after cyclical unemployment has been eliminated by preventing or correcting business-cycle contractions. This leaves frictional and structural unemployment (ignoring the seasonal variety which is largely irrelevant to macroeconomic policy).

When policy makers use the term full employment, they do not mean that absolutely everyone one has a job at any given moment. What they mean is that cyclical unemployment has been eliminated. What remains are frictional and structural unemployment that is a natural part of the economy.

With the labor and other resource markets in equilibrium, there is no pressure for wages or other resource prices to change. If resource prices remain stable, then production cost and output prices remain stable. In fact one of the more important policy aspects is that natural employment can persist with NO inflation.

A few observations about natural unemployment are order:

• One, natural unemployment is the combination of frictional and structural unemployment. The economy will always have some degree of frictional and structural unemployment.

• Two, frictional and structural unemployment do not result from the lack of available jobs, only from the problems of getting workers and jobs together. In other words, the quantity demanded equals the quantity supplied. Natural unemployment is thus, from a practical viewpoint, considered synonymous with full employment.

• Three, because the demand and supply quantities are equal, there is no pressure on factor prices (wages) to change. As such, natural unemployment can be sustained with no changes in inflation. The same cannot be said about cyclical unemployment.

• Four, because natural unemployment can be sustained without affecting inflation, it provides an excellent target for macroeconomic stabilization policies. Policies that achieve and maintain ONLY natural unemployment essentially eliminate ALL business-cycle instability.

The appropriate natural unemployment is not simply a high-brow, academic discourse among pointy-headed economists either. If the economy has reached the natural unemployment level, then the government need take no further action to move it lower. Doing so, in fact, would trigger inflation.