Full Employment as a Goal of Public Policy

Abstract

THE THEORY of income determination generally accepted today shows that, left to itself, the American economy may display significant fluctuations in income, output, and employment. The theory suggests to many that public policy should have as a goal the attainment and the sustaining of high levels of these aggregates, which we may generalize by the term full employment. Even if accepted, the goal needs more precise definition. We may define full employment as the absence of involuntary unemployment, excluding acceptable frictional unemployment. On the one hand, purely voluntary unemployment is thus dismissed as of no proper concern to anyone other than the unemployed individuals, apart from times of national emergency such as war. On the other hand, the definition implies that some amount of frictional unemployment will probably have to be accepted. One may ask: Why tolerate any involuntary unemployment, frictional or otherwise? Cannot the American economy guarantee a job to everyone at all times who is willing and able to work? The answer is that we probably could do so, but at a price we might find rather high. As employment reaches a saturation point, inflationary pressures are likely to mount sharply. Less efficient types of labor (in terms of work to be done) and poorer grades of materials are likely to be all that are left for many firms, with the result that marginal variable costs tend to rise even where price and wage controls may be in effect. There may also be problems of plant capacity: new installations, to break bottlenecks, may require temporarily even more serious shortages of finished consumer goods to free resources for plant construction. If there is a publicly acknowledged guarantee of full employment in the literal sense, both labor and industry, in our environment of administered pricing and collective bargaining, may give way to price and wage increases in somewhat undisciplined fashion. No doubt government, by sufficiently increasing aggregate monetary demand, could overwhelm the last bits of involuntary unemployment, in much the same way that river islands may be submerged by enough flood waters hurtling downstream. In so doing, however, it would probably let loose serious inflation, just as the cascade of flood waters might not only submerge the islands but also go over the banks of the river. It may be argued that in such case the inflationary pressures can be at