Full Employment
The level of employment at which all workers who want to work at prevailing wages are employed, with only frictional and structural unemployment remaining.
What is Full Employment?
Full employment is an economic condition in which virtually all people who are willing and able to work at the prevailing wage rate are employed. It does not mean zero unemployment — economists recognize that some level of frictional unemployment (people between jobs) and structural unemployment (skills mismatch) is unavoidable even in a healthy economy. The unemployment rate associated with full employment is called the non-accelerating inflation rate of unemployment (NAIRU) or the natural rate of unemployment, estimated at roughly 4–5% in the United States. The Federal Reserve's dual mandate from Congress is to promote maximum employment alongside stable prices (2% inflation). When the economy operates above full employment, labor markets tighten, wages rise, and inflationary pressure builds. Below full employment, output falls short of potential GDP, creating an output gap.
Example
The U.S. unemployment rate fell to 3.4% in January 2023 — its lowest level since 1969 — widely described as at or below full employment. With labor markets this tight, employers competed aggressively for workers by raising wages. Average hourly earnings grew at roughly 4.4% year-over-year, contributing to inflationary pressure that prompted the Federal Reserve to raise interest rates aggressively.
Source: U.S. Bureau of Labor Statistics — Labor Force Statistics