Why is the economy operates away from full employment from time to time?

Answer 1

There are two main reasons - sticky wages and skills mismatches.

Wages tend to be sticky downwards because workers resist wage cuts and employers. The phenomenon known as 'money illusion' is another reason. Therefore, if the equilibrium wage falls, it takes time for the real wage to adjust, either wages do eventually fall or inflation reduces the value of the real wage. If the price of labour is too high, demand for it falls and you get unemployment. Minimum wage laws can add to this effect.

The other reason is that if one sector of the economy suddenly expans, the available workers might not have the right mix of skills straight away and take time to train up. For example, manufacturing is declining in most western countries, while IT jobs are increasing. An unskilled factory worker cannot move striaght into an IT job and may go through a period of unemployment above the 'normal' level of structural/frictional unemployment.

Answer 2

All economies are dynamic models and they never operate at a stable point. All macroeconomic indicators vary within a cycle. The output level of full employment describes a point where the economy is in perfect balance. By this way it is possible to examine the effects of different indicators and how they adjust to return back to the full-employment level.