Full Employment Equilibrium - Explained

What is the Above Full Employment Equilibrium?

Updated at June 27th, 2021

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What is the Above Full-Employment Equilibrium?What is Below Full Employment Equilibrium?When is the Job Market Above the Full-Employment Equilibrium?A Little More on What is Below Full Employment Equilibrium Academic Research on Full Employment Equilibrium

What is the Above Full-Employment Equilibrium?

When an economy manufactures goods or products at higher economic rates than normal, it is regarded as above full-employment equilibrium. The gross domestic product (GDP) of an economy often reflects the normal rate at which goods or commodities are expected to be produced in an economy. When the rates of production however shoots higher than the appropriate rate measured by the GDP, there is an above full-employment equilibrium. Above full-employment equilibrium is also an indication that the real GDP of an economy is more than what have been recorded in previous years. When the real GDP is more than long-term potential, it might be as a result of inflation experienced in the economy.

What is Below Full Employment Equilibrium?

The Below full employment equilibrium is a term in economic analysis that shows that the output of the short-run gross domestic product (GDP) of an economy is lower than the expected long-term GDP of the same economy. This means that the current GDP is lower than the potential real GDP. The gap between these two GDPs is an indicator of a recessionary period in the economy. The below full-employment equilibrium is used in macroeconomics to depict a situation in an economy where economic inputs are giving less than the expected level of employment that could have been achieved.

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When is the Job Market Above the Full-Employment Equilibrium?

Usually, if an economy or market is in equilibrium, excess short-term supply will not occur, but an above full-employment equilibrium is one that witnesses the production of goods or commodities at higher levels. When a market or an economy is overly vulnerable, higher prices, higher wages and increased production will occur. This will however trigger inflationary pressures. The definition of above full-employment takes the GDP of a nation into consideration. This term refers to a situation in which products and services are produced at higher rate (more than the long-term average). The difference between the current real GDP and the long-term historical average can be as a result of inflation pressures and differences. However, when the rise in prices restores demand to its normal rate, equilibrium will occur. An economy can recover from a state of above full-employment equilibrium given certain factors and measures. The policy of fiscal expansion is one of the significant ways the government can overcome the cause of above full-employment equilibrium. Where there is a notable change in demand such as increase in public spending, increase in military spending, tax cuts, government incentives, among others can help an economy overcome the state of above full-employment equilibrium. These measures would help stimulate demand in an economy.

A Little More on What is Below Full Employment Equilibrium

Below full employment equilibrium is realized when an economy is below its long-term potential real GDP level, the gap between the current GDP and potential GDP would also lead o a gap in the employment level in the economy. When there is a gap in the employment level, it means the economy is tilted towards a recession. A full employment equilibrium means an economy is adequately using all its input resources such as labor, capital, land, real estate, and others. While a below employment equilibrium means input resources are not utilized to the fullest potential in an economy.

Academic Research on Full Employment Equilibrium

Equilibrium unemployment as a worker discipline device, Shapiro, C., & Stiglitz, J. E. (1984). The American Economic Review, 74(3), 433-444.
Capital expansion, rate of growth, and employment, Domar, E. D. (1946). Econometrica, Journal of the Econometric Society, 137-147.
The economic implications of learning by doing, Arrow, K. J. (1962). The review of economic studies, 29(3), 155-173.
A model of imperfect competition with Keynesian features, Hart, O. (1982). The Quarterly Journal of Economics, 97(1), 109-138.
Growth cycles and inflation in a model of the class struggle, Desai, M. (1973). Journal of Economic Theory, 6(6), 527-545.
Marginal productivity and the macro-economic theories of distribution: comment on Samuelson and Modigliani, Kaldor, N. (1966). The Review of Economic Studies, 33(4), 309-319.
The classical stationary state, Pigou, A. C. (1943). The Economic Journal, 53(212), 343-351.
Money-wage dynamics and labor-market equilibrium, Phelps, E. S. (1968). Journal of political economy, 76(4, Part 2), 678-711.
Economic methodology in the face of uncertainty: the modelling methods of Keynes and the Post-Keynesians, Kregel, J. A. (1976). The Economic Journal, 86(342), 209-225.
A welfare economics foundation for the full-employment policy, Otaki, M. (2009). Economics Letters, 102(1), 1-3.
On reanalyzing the Harris-Todaro model: Policy rankings in the case of sector-specific sticky wages, Bhagwati, J. N., & Srinivasan, T. N. (1974). The American Economic Review, 64(3), 502-508.
Keynes's approach to full employment: aggregate or targeted demand?, Tcherneva, P. R. (2008). Keynes's approach to full employment: aggregate or targeted demand?. This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to close the demand gap, are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an on the spot approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.
Disguised Unemployment and Agricultural Development, Mehmet, O. (1971). Disguised Unemployment and Agricultural Development.Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie,19(1), 12-21. This paper presents a theoretical analysis of disguised unemployment in less developed countries, which tends to lend support for agricultural development policies as the most effective means of eliminating such unemployment. In addition, it is shown that urban unemployment may also be remedied through such policies. The overall conclusion of the theoretical analysis is that agricultural policies in the less developed countries manifesting disguised and urban unemployment should, as a first target, aim at maintaining farming activities throughout the calendar year at levels achieved during peak seasons.
Echoes of Veblen'stheory of business enterprisein the later development of macroeconomics: Fisher's debt-deflation theory of great depressions and the financial, Dimand, R. W. (2004). Echoes of Veblen's theory of business enterprise in the later development of macroeconomics: Fisher's debt-deflation theory of great depressions and the financial instability theories of minsky and tobin.International Review of Sociology,14(3), 461-470. Irving Fisher's debt-deflation theory of great depressions, first published in 1932 and 1933, was invoked by Hyman Minsky and James Tobin as a crucial precursor of their theories of macroeconomic financial instability. This paper argues that Wesley Mitchell was right to perceive a close intellectual affinity between Fisher's debt-deflation theory and Thorstein Veblen'sTheory of Business Enterprise(1904), and that this affinity also exists between Veblen (1904) and the analyses of Minsky and Tobin.
An empirical analysis of remittance flows into West African Economic and Monetary Union: a panel time-series approach, Donou-Adonsou, F., & Lim, S. (2016). An empirical analysis of remittance flows into West African Economic and Monetary Union: a panel time-series approach.Applied Economics,48(11), 1018-1029.
External debt, government expenditure, investment and growth, Gupta, G. S. (2001). External debt, government expenditure, investment and growth. InContemporary Issues in Development Economics(pp. 125-138). Routledge. The full employment theory of the classical school has been proved wrong by the real life experiences of the world since the Great Depression. Though the Keynesian theory of the possibility of both full as well as below full employment equilibrium has the limitations of ignoring the role of expectations and policy lags, among others, its prescription of enlarging the effective (aggregate) demand to remove unemployment is still valid. For a developing economy, a relatively easy way to expand aggregate demand would be through an increase in government expenditure nanced through raising external debt. Thus, external debt, to the extent it is sustainable, could be a way to alleviate the problem of unemployment and to push up growth.

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