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I am a bit confused about the term "full employment".

I am currently learning about the labour market model, and how that is influenced by changes in aggregate demand. My textbook states "As increased output requires increased production, this will result in increased demand for labour. This is shown on the graph above as the movement from Y1 to Y2. The gap between Y2 and the full employment level is reduced, therefore unemployment is reduced (and the recessionary gap is lessened)."

Does this mean that "full employment" is talking about everybody in the country being employed, or is it talking about the full employment of resources, which include workers? And is the aggregate demand which is seen in the graph below separate to the labour market model demand?

enter image description here

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This answer will not help you get a good grade in course using a mainstream textbook, but it points you into the direction of the real world answer.

The text “Full Employment Abandoned: Shifting Sands and Policy Failures” by William Mitchell and Joan Muysken gives the history of the “full employment framework” and its demise.

If we look at the 1948 Universal Declaration of Human Rights (United Nations), Article 23 it has the passage:

Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.

Beveridge’s “Full Employment in a Free Society” defined “as an excess of vacancies at living wages over unemployed persons” (quote is from Mitchell and Muysken). In other words, there is always a living wage job available for all workers; unemployment is largely voluntary. In the real world, this was associated with an unemployment rate of 2% or less, corresponding to most estimates of “frictional unemployment”.

In the following decades, many economists kept re-defining “full employment” to mean practically anything other than this concept. For example, by equating “full employment” with NAIRU, it would be possible to argue that for some countries the euro periphery achieved “full employment” in the aftermath of the Financial Crisis with an unemployment rate of 18% (contemporary NAIRU estimates).

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