Evaluate the view that full employment should be the primary macro-economic objective of governments. [25]

The main macro-economic objectives of governments include ensuring stable prices and low inflation; promoting economic growth, both in terms of actual and potential growth; full employment (or conversely low unemployment), and ensuring a healthy balance of payments (BOP). This paper argues that, on the one hand, while governments should aim for full employment, full employment should not just be their primary macro-economic objective.   

Unemployment is defined as the situation where those who are able and willing to work are not able to get jobs, and full employment involves zero or very low unemployment. (In economic theory, there are many types of unemployment, such as frictional unemployment and demand-deficient unemployment, among other examples.) In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. It can be argued that an unemployment rate of around three percent is close to full employment. However, it is difficult to determine the full employment level precisely. Full employment implies that the economy is operating at its full capacity and there is no output gap or demand-deficient unemployment.

One of the most important reasons that governments target full employment is that because high unemployment has various social and economic costs. First, unemployed citizens will earn little income, enabling little consumption as they do not have much disposable income. Also, the unemployed may become less motivated and less skilled, losing their human capital, which makes it more difficult to find employment in the future, and with a lack of skills, even with economic opportunities, they cannot get jobs. Also, during periods of high unemployment, the government will have to spend more on unemployment benefits and other transfer payments, which may increase government borrowing. Finally, unemployment may exacerbate social problems such as crime, vandalism and social alienation, especially if unemployment is concentrated among young people, for example in Spain during the financial crisis, when youth unemployment rose massively. Therefore, given the social and economic costs of unemployment, there are many benefits to achieving full employment.

To achieve full employment, Keynesian economists will argue that it is necessary to increase AD when the economy is in a recession. For example, this can be achieved by expansionary fiscal or expansionary monetary policy, which means increasing government spending and reducing direct taxes, and increasing money supply and reducing interest rates respectively. These expansionary policies will cause AD to increase and shift to the right, increasing inflation if the economy is at or near the full employment level, but if there is spare capacity or un-utilised resources there should only be a limited increase in inflation. Therefore, there is a strong economic case for aiming for full employment through demand management policies. And the Phillips curve suggests there is a trade-off between inflation. Therefore, achieving full employment may cause the side effect of demand-pull inflation.

On the other hand, not all economists agree that full employment should be the primary objective of governments. They argue that unemployment cannot be reduced below the natural rate of unemployment (or NAIRU, or Non Accelerating Inflation Rate of Unemployment) without causing inflation. Keeping inflation low is also another objective of governments. Also, any reduction in unemployment below the natural rate, due to demand management policies, will just be temporary. This is because the economy will return to the equilibrium level of national output. Therefore, monetarist economists do not believe there is any point in reducing unemployment below the natural rate because the only effect will be to increase inflation. Therefore, according to monetarist economists, attempts to achieve ‘full employment’ of three percent may conflict with other macro-economic objectives, such as higher inflation. For example, many economies have an inflation target as the primary objective of their Central Bank, such as the Federal Reserve, and the economic argument here is that if low inflation is achieved, it will enable economic stability and encourage investment and sustainable growth in the long term. This is preferable to a government using demand-management policies and causing economic boom and bust cycles.

However, another way of aiming for full employment is to use long run supply side policies to try and reduce the natural rate of unemployment. For example, increased training opportunities and better education can upgrade the skills of workers and reduce structural unemployment, which is what initiatives such as SkillsFuture aim to achieve. However, these economic policies will take time and it may not be possible for the government to reduce all unemployment because of imperfect information and bounded rationality on the part of government agents.

And low unemployment can also be achieved through keeping inflation low and maintaining steady and sustainable growth. For example, in the 1990s, both unemployment and inflation fell due to supply side policies and effective demand management. Therefore, this suggests that a low inflation target can also be effective in meeting other objectives. 

In conclusion, overall, low unemployment is a desirable objective, but the economic policies to achieve this need careful examination because of their limitations and alternative macro-economic objectives. Increasing AD will only be effective if there is a recession and spare capacity in the economy. To reduce the natural rate, long run supply side policies will also be needed. In addition, full employment does not necessarily have to be inflationary too, as economic growth is sustainable, we could get close to full employment without inflationary pressures.

JC Economics Essays – This A level economics essay was based on lecture material from a UK economics tutor. It was in response to an adapted question from the A level Economics syllabus. Also, it was written during examination conditions of time pressure. What did you learn from this response, and what economic theories did it tap on to addressing the economics essay question? However, this economics paper is not very strong in the anti-thesis arguments - what could be done better? How could the other side of the story or narrative be made even better? In addition, there were some economics terms which were mentioned - did the writer define the terms? How could the writer have woven the definition of the terms into the sentences? These critical thinking questions should be asked when you read economics essays. 

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