Graphical Indications

Production Possibilities
Aggregate Market

• Production Possibilities: Full employment is indicated by the boundary of the production possibilities frontier. The production possibilities frontier is constructed under the assumption that all available resources are engaged in production of two goods. As such being on the frontier is, by definition, tantamount to full employment.


• Aggregate Market: Full employment is indicated by the position of the long-run aggregate supply curve. The long-run aggregate supply curve is constructed based on the assumption that flexible prices have adjusted to achieve equilibrium in all markets. Most important, resource markets are in equilibrium, with quantities demanded equal to quantities supplied. In other words, for the labor market, the number of jobs available matches the number of workers available.

Natural Unemployment

Historical evidence indicates that a 5 to 5 1/2 percent unemployment rate meets these conditions. If the unemployment rate drops much below 5 to 5 1/2 percent, then the inflation rate increases, suggesting that the economy is trying to produce more output than it is capable of doing. However, some contend that full employment exists at a higher unemployment rate, while others argue that a lower unemployment rate is correct.

The Politics of Full Employment

Consider the two basic political philosophies--liberals and conservatives.

• Liberals: Those who comprise the working class and occupy the lower end of the income spectrum, tend to favor the pursuit of full employment more than most. They are the ones most likely harmed by unemployment and thus to benefit from full employment. Liberal politicians count these folks among their core constituency.


• Conservatives: Those who own businesses and are on the employer side of labor markets tend to be less inclined to think full employment is a beneficial state of the economy. Because everyone already has a job, full employment makes it more difficult and costly to hire new workers. A little bit of unemployment tends to make hiring easier. Conservative politicians count these folks among their core constituency.