“Full employment” sounds like a bit of a pipe dream. But the UK may in fact be approaching it — in fact it may already be there.
The economic concept of full unemployment basically means a level where almost everyone who wants to work will be in work — i.e. the supply of jobs is strong enough to meet demand.
Zero unemployment is actually undesirable from an economic stand-point as in theory it would allow employs to dictate their own pay and as a result drive inflation.
Looked at another way, full employment is basically the sweet spot for the economy and should offer some stability.
Employment in the UK is currently at a record high — 73.5% — and unemployment is at its lowest point since 2008. So are we at full employment?
Martin Beck, senior economic adviser to the EY ITEM Club, said: “Today’s figures offer the first real hint that the pattern of sharp falls in unemployment and subdued wage growth that the UK labour market has seen for much of the past few year is starting to change. Both of the main measures of unemployment saw smaller falls in the latest data alongside a clear acceleration in wage growth.”
One of the knock on effects of full employment is wage growth. With fewer people looking for work, employers are forced to raise pay to attract workers. That’s exactly what we’re seeing, with wages accelerating at the fastest rate in four years.
The UK unemployment rate has also just hit the same level, 5.5%, at which BNP Paribas declared full employment in the US earlier this year.
But Alastair Winter, chief economist at stockbroker Daniel Stewart, doesn’t think we’re in the economic sweet spot. He told Business Insider: “The short answer is no, we are not there yet.”
Winter thinks more jobs will be created by government initiatives like apprenticeships and small business funding, while public sector cuts and the rise of robots will chip away at employment elsewhere.
Winter says: “I see both supply and demand of workers going up, but that does not mean either output or wages may rise much because of the rise and rise of services jobs, which are holding back productivity.
The Bank of England sees productivity as a big issue, warning today that the economy is creating the wrong type of jobs.
Winters says: “I suspect if the headline rate fell below 4.5% there would be a definite case for calling full employment so maybe the level is 4.5 to 4.8%.”
The Bank of England and the Office for Budget Responsibility also puts its full employment threshold below out currently unemployment. Both institutions set the level at 5%, using a measurement called the non-accelerating inflation rate of unemployment, or NAIRU.
Still, while we may not be a full employment yet, the signs are the economy is heading towards it.
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