In economics, full employment does not mean 100 percent of the labor force is working. Rather, full employment refers to a state in which everyone who is able to work and wants to work can find a job at prevailing wages for their occupations. There are always some people eligible to work who aren’t employed at any given time. When economists calculate full employment, they take this unemployed group into account.
An economy is at full employment when there is no cyclical unemployment, such as workers who are jobless because of a recession. Workers have jobs with the exception of those who are out of work due to structural or frictional unemployment. Structural unemployment refers to workers who are displaced by a mismatch between their skills and the jobs available. Structural unemployment occurs for a variety of reasons, including loss of jobs due to automation, due to foreign competition or natural disasters or because employers move to another region. Frictional unemployment refers to workers who have left previous jobs and have not yet found new employment. Frictional and structural employment comprises the natural unemployment rate. Suppose the natural unemployment rate equals 4 percent; another way of saying that is to say that when 96 percent of workers are employed, the economy is at full employment.