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What is the Keynesian interpretation of full-employment?

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 8 Jun 2023

The Keynesian interpretation of full employment is different from the traditional or classical view of full employment. According to Keynesian economics, full employment does not mean that every individual is employed or that unemployment is completely eliminated. Instead, it refers to a situation where the economy is operating at its potential level of output or employment that is consistent with stable inflation.

Keynesian economics emphasises the key role of aggregate demand in determining employment levels and economic output.

In the Keynesian framework, full employment is achieved when there is sufficient aggregate demand to utilize all available resources, including labor, capital, and technology. It is the level of employment at which there is no involuntary unemployment or a significant output gap.

Keynes argued that in a market economy, aggregate demand can fall short of the level needed for full employment due to various factors, such as a lack of private investment, weak consumer spending, or a decline in government spending. In such situations, there can be involuntary unemployment, where individuals who are willing and able to work cannot find employment.

To achieve full employment, Keynesians advocate for active government intervention in the economy, particularly through fiscal policy.

They argue that during periods of deficient aggregate demand, the government should increase its spending and/or reduce taxes to stimulate demand and boost economic activity.

By increasing aggregate demand, the government can help bridge the negative output gap and reduce unemployment.

In the Keynesian view, achieving and maintaining full employment is seen as a crucial policy objective to promote economic stability and social welfare.

They argue that when there is significant unemployment, it not only leads to wasted resources and lost output but also creates social and economic costs, such as reduced incomes, lower consumer spending, and inequality.

It's important to note that the Keynesian interpretation of full employment differs from the classical view, which suggests that a market economy will naturally tend toward full employment through flexible wages and prices. Keynesians challenge this notion by highlighting the potential for persistent unemployment and the need for government intervention to address it.

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