Today, as thirty and forty years ago, economists debate how much unemployment is voluntary, how much involuntary, how much is a phenomenon of equilibrium, how much a symptom of disequilibrium; how much is compatible with competition, how much is to be blamed on monopolies, labor unions, and restrictive legislation, how much unemployment characterizes full employment. A concept of full employment more congenial to economic theory is labor market equilibrium, a volume of employment which is simultaneously the amount employers want to offer and the amount workers want to accept at prevailing wage rates and prices. Forty years ago theorists with confidence in markets could believe that full employment is whatever volume of employment the economy is moving toward, and that its achievement requires of the government nothing more than neutrality, and nothing less After Keynes challenged the classical notion of labor market equilibrium and the complacent view of policy to which it led, full employment came to mean maximum aggregate supply, the point at which expansion of aggregate
demand could not further increase employment and output. With a deflationary gap, demand less than full employment supply, prices would be declining or at worst constant. Expansion of aggregate demand short of full employment would cause at most a one-shot increase of prices. Postwar experience destroyed the identification of full employment with the economy’s inflation threshold. The natural rate is another full employment candidate, a policy target at least in the passive sense that monetary and fiscal policy makers are advised to eschew any numerical unemployment goal and to let the economy gravitate to this equilibrium. Full employment is once again nothing but the equilibrium reached by labor markets unaided and undistorted by governmental fine tuning. The presumption he challenged is that in competitive labor markets actual employment and unemployment reveal workers’ true preferences between work and alternative uses of time, the presumption that no one is fully or partially unemployed whose real wage per hour exceeds his marginal valuation of an hour of free time.