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FULL EMPLOYMENT

Learn how we can reach a level of Full Employment by reducing the workday and the benefits that it will create.

    A good economic system does not need to provide free handouts to people. Instead, it should empower people to become productive individuals who participate in the production process of goods and services by getting a job as well as enable them to become consumers of these goods and services available in the market by having those jobs provide decent incomes. One way to accomplish this is by creating a state of Full Employment where people will have the opportunity not only to find a job, but one with decent income as well. Reducing the work-day is one way to get to this stage of Full Employment. 

    To clarify, Full Employment does not mean 100% employment. Full employment means that there is zero cyclical unemployment, that is, the unemployment caused by economic downturns, by businesses not having enough demand for labor in order to employ the people who are looking for jobs. Structural and Frictional Unemployment are thought to be part of the economy and therefore will always be there. A better definition is perhaps the one used by Dean Baker and Jared Bernstein from the Center for Economic and Policy Research (CEPR): 


"Full employment can be defined as the level of employment at which additional demand in the economy will not create more employment. All workers who seek a job have one, they are working for as many hours as they want to or can, and they are receiving a wage that is broadly consistent with their productivity. The only people in the labor market not working are the ones who do not have the skill or ability to work (the structurally unemployed) and those who are between jobs (the frictionally unemployed). (Baker and Bernstein, 2013)"  

    Full employment is also known for requiring a balance between unemployment and inflation. The famous Phillips Curve shows the relationship between unemployment and inflation in the economy. As unemployment goes down, bargaining power for workers increases and they demand higher wages. Firms therefore pass those higher labor costs to the consumers as a way of higher prices, therefore creating inflation. And it works the other way around as well.

    Full Employment then is the desired level of unemployment that does not cause inflation. This is known as NAIRU (Non-Accelerating Inflation Rate of Unemployment). We'll return to NAIRU later. 

    Why is Full employment so important? One of the reasons is because it increases the bargaining power of workers, translating into better wages. When managed properly, this is a much more efficient way of increasing purchasing power than increasing minimum wage levels. Of course, we shouldn't forget or ignore the Phillips curve, which means that this increase in bargaining power could lead to inflation. However, we should make two points here. 

    First, according to many economists, NAIRU should be somewhere between 5% and 5.5%, some of them even considering it as high as 6% (Hilsenrath and Zumbrung, 2014). Currently the FED has the NAIRU established as 4.8%. The reality is that there is not an exact way to calculate NAIRU, but what we do know, as Baker and Bernstein point out, is that the costs of overestimating NAIRU, meaning, setting it up too high, are far greater than underestimating it, and this cost is mostly paid by the working class facing decades of income stagnation (Baker and Bernstein, 2013b). Among the reasons they present to argue that NAIRU should be lower, at around 4%, two of them are worth noticing: We experienced for example low unemployment levels (below NAIRU estimates) during the second half of the 90's decade, without creating inflationary pressures. This means that the unemployment level was still above where NAIRU should be. Additionally, economists agree that the Phillips curve has flattened, therefore, changes in unemployment levels will have much lower impacts on inflation as previously thought.

    The second point is that inflation generated by higher demand is not necessarily a bad thing. Inflation can be understood as "too much money chasing too few goods". Wages could cause an inflationary problem when production doesn't rise as fast as wages grow. Additionally, We have seen that wages have remained stagnant from the 70's while productivity has doubled. Those profits generated by this dynamic have gone not for the worker who is producing more per hour, but to corporation and executives. If wages go up, businesses could choose to pass that cost to the consumer as a way of higher prices or to absorb those cost in terms of lower profits. The latter would be a positive outcome given the levels of inequality. (The Real News, 2010

    Full Employment could also alleviate the stagnation wages have suffered since the 70's in the United States, and therefore, alleviate income inequality. Full employment then could be a great tool to fight poverty.  

    Among the ways to increase employment and generate jobs, one way would be to increase output (Economic Growth), which in turn, generates demand for labor. On the other hand, we have the option of share the workload by reducing the work day and thus generate new job opportunities not only for the unemployed, but also for the people who are involuntarily working part-time, but would like to work more hours. It could even include the people who are not normally included as part of the labor force but, due to the reductions in the work day, they might decide to enter the labor market, like college students, stay-at-home parents, discouraged workers, etc... 

    Economic Growth is not very strong -and, as we have seen previously, not a desired pattern we should follow in the long run given that we live in a finite planet-. Additionally, many people consider the so-called recovery as a Part-Time Recovery due to the unexpected increase of part-time jobs. Therefore, the best (and even most effective way) to generate more jobs with decent incomes and to reach a level of Full Employment is to set policies that reduce the standard work-day.


REFERENCES

  1. Baker, D., Bernstein, J. (2013).  Getting Back to Full Employment. A better Bargain for Working People. Center for Economic and Policy Research (CEPR). Retrieved from: http://cepr.net/documents/Getting-Back-to-Full-Employment_20131118.pdf
  2. Baker, D., Bernstein, J. (2013). The Unemployment Rate at Full employment: How Low Can You Go? Center for Economic and Policy Research (CEBR). Retrieved from: http://cepr.net/publications/op-eds-columns/the-unemployment-rate-at-full-employment-how-low-can-you-go 
  3. Hilsenrath, J., Zumbrun, J. (2014).  U.S. Jobless Rate Closing in on NAIRU Estimate. The Wall Street Journal. Retrieved from: http://blogs.wsj.com/economics/2014/07/15/u-s-jobless-rate-closing-in-on-nairu-estimate/
  4. The Real News. (2010) Do Higher Wages Cause Inflation? Interview to Robert Pollin [Interview by P. Jay]. (2010, March 7). Retrieved March 1, 2016, from http://therealnews.com/t2/?option=com_content&task=view&id=31&Itemid=74&jumival=4853
  5. US. Congressional Budget Office, Natural Rate of Unemployment (Short-Term) [NROUST], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/NROUST, March 22, 201

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