the UK economy move towards full-employment?
This question is now being raised as total unemployment continues to decline
and evidence grows that the economy has managed to avoid a recession in the
current economic cycle.
is no unique definition of full-employment. Most economists are in agreement
that unemployment cannot fall to zero since there will always be some
frictional unemployment caused by people moving into the labour market
(searching for work) and others switching between jobs and experiencing short
periods of time out of work.
might also be defined as a situation where the labour market has reached a
state of equilibrium - i.e. when those in the active labour force who are
willing and able to work at going wage rates are able to find work. At this
point the remaining unemployment would essentially be frictional.
countries have made significant progress towards reaching full-employment in
recent years. The chart below shows the standardised unemployment rates for
the United States, UK and Germany since 1992. Germany clearly still has an
unemployment problem - but in the States and the UK - the current
unemployment rates are at their lowest rates for over twenty years.
interpretation of full-employment is when the total of people out of work
matches the number of unfilled job vacancies. The problem with this is that
estimates of the scale of job vacancies vary considerably. Some economists
believe that the true number of jobs available is three times the official
Close Is The UK To Reaching Full-Employment?
to the claimant count measure, there are 1.2 million people claiming the Job
Seekers' Allowance (4.0% of the labour force). The alternative Labour Force
Survey puts unemployment somewhat higher at 1.7m (5.9%). In some towns
however we have already reached effective full-employment
that full-employment is achieved when 2% of the labour force are out of work
(i.e. when the employment rate has reached 98%) - the UK economy will have to
create another 800,000 to 1,000,000 new jobs for full-employment to be
achieved. Many of those unemployed at the moment are out of work for
structural reasons and despite a series of active labour market policies
designed to bring them back into work, they remain a major long-term problem
for the economy.
The Risk Of Wage Inflation
obstacle to reaching full-employment is the risk that inflation will pick up
as more people find work and total spending in the economy causes businesses
to raise prices.
unemployment is falling, there is pressure on firms to bid up wages both to
attract and retain staff. Labour shortages that cause an acceleration in wage
inflation might persuade the Bank of England to increase interest rates. This
would slow down the economy and the rate of new job creation might suffer as
the economy has enjoyed a sustained fall in unemployment over the last six
years, bringing unemployment down much further may prove difficult.