Goals for Unemployment

If unemployment is too low, firms cannot find workers, resulting in output loss.

One of our basic macroeconomic goals is something called full employment. Full employment does NOT mean zero unemployment. To understand what full employment means, let's look at 3 types of unemployment:

Frictional unemployment is the unemployment that results from people switching jobs or entering the labor market. The job search takes time, so this type of unemployment is inevitable. Frictional unemployment is temporary because the jobs and workers are there; they just have to find each other. Recent college graduates who take a couple of months to land a job are an example of frictional unemployment. Employment agencies, classified ads, the internet all reduce the time is takes to match job offers to job seekers but some frictional employment will always exist.

Structural unemployment is more serious. This type of unemployment is caused by a mismatch between job skills needed and jobs skills possessed by job seekers, or a mismatch in the location of jobs and job seekers. Although the jobs are out there, the job seekers are not qualified for them or have to move to find them; making structural unemployment more long-term as people retrains or relocates. For example, many garment workers have lost their jobs in the U.S. as factories move overseas, but they are not qualified to fill job openings for computer programmers and web developers. With the rapid pace of technological change and growth of global markets, structural unemployment is also inevitable.

Cyclical unemployment occurs when there are too few jobs available due to an economic slowdown. Due to low demand for goods and services, the number of workers demands is less than the number of workers available in the labor force. Cyclical unemployment corresponds to recessions.

Back to full employment. What is it? Since 1946, the federal government is required to pursue the goal of full employment, but does not specify exactly what it is. Full employment occurs when cyclical unemployment is zero, and structural and frictional unemployment are at a minimum. When unemployment is higher, resources are not being used efficiently. When the unemployment rate is lower, the shortage of workers will cause wages and prices to rise, triggering inflation.

So the goal of full employment is defined as the lowest unemployment rate consistent with stable prices. The Full Employment and Balanced Growth Act of 1978 get more specific with goals of 4% for the unemployment rate and 3% for inflation.