Full employment is a widely used term, although often different people mean different things. There are two important issues to consider. The first one concerns the resource the term refers to. In my discussion, full employment refers to labor. Underutilization of plant and equipment is not the problem that developing countries face, as noted above. The second issue regards the level to which “full” refers to. During the last three decades, the term “full employment,” as used in orthodox circles, refers to the nonaccelerating inflation rate of unemployment (NAIRU), one of the most powerful notions in economic policy since the 1970s. This is the level of unemployment that is associated with price stability, even if many workers ready and willing to work are unemployed. The basic proposition underlying the NAIRU is that policy makers cannot use deficit spending or an increase in the money supply to reduce unemployment below some “equilibrium” rate, except at the cost of accelerating inflation. This is an important departure from the Keynesian view that inflation poses a problem only when the economy approaches full employment.

Full employment in the framework of the NAIRU obviously places fighting inflation (as a macroeconomic objective) above combating unemployment. Indeed, the view that price stability requires maintaining a pool of unemployed means that the fiscal and monetary brakes have to be slammed as soon as economic growth causes unemployment to drop below a certain level. Many policy makers and politicians also seem to have accepted this concept and hold the view that there is a natural rate of unemployment that is invariant to aggregate spending. They argue that this natural rate can be reduced only through supply-side measures: deregulation, privatization, and welfare reforms (e.g., cutting the minimum wage, eliminating unemployment benefits), or upgrading the skills of workers. For those who view the economy through this lens, supply-side measures are the only way to reduce unemployment. Moreover, when this is close to the NAIRU, the monetary authorities must take prompt anti-inflationary measures to prevent the economy from overheating, otherwise inflation will not only grow but will also accelerate (I will take up these issues again in chapters 11 and 12).