The economic health of a country is affected by its employed and unemployed workers. Two major economic indicators include full employment and unemployment. Although full employment and unemployment affect an economy, their definitions and economic effects are vastly different. Full employment occurs when all labor resources are used to put people to work. Unemployment exists when willing workers cannot find jobs. Understanding full employment and unemployment can help businesses properly prepare for economic changes.

Full Employment

Full employment exists when everyone who desires to work for the current market rates is employed. It is more theoretical than actual. Full employment does not mean that zero unemployment exists because some people are unemployed through their own choosing. Full employment takes frictional unemployment into consideration. Frictional unemployment happens when workers are between jobs. Dean Baker and Jared Bernstein wrote on the website of the Economic Policy Institute that full employment relates to when the number of workers seeking employment matches the number of job positions offered by employers.


Full employment brings with it the chance for inflation. When the unemployment rate falls below the full employment rate, it puts a high demand on goods and services. Full employment usually results in an increase in wages, which leads to an increase in costs for companies. Companies with increased costs usually make up for increased costs by raising the price of their products and services, which by definition is inflation.


High unemployment can adversely affect a nation because consumers reduce their purchases of goods and services. Most businesses within the United States are required to pay unemployment insurance. When a worker experiences unemployment through no fault of his own, he is entitled to apply for unemployment benefits. Benefits are temporary financial payments made to qualified unemployed workers for a specific time and dollar amount.

Types of Unemployment

Structural unemployment occurs when the typical wages offered in the labor market do not match the skills of workers. An example of structural unemployment can relate to technological advances in some industries. Workers without the technological skills needed to hold a job may find themselves unemployed because they are unqualified. Cyclical unemployment results from volatility in the economy. For example, cyclical unemployment occurs during an economic recession. In such conditions, the economy is declining and employers lay off workers to reduce expenses.