Factors that Shift the Full Employment Line

The full-employment line, or FE line, depends on three main factors: productivity, labor supply, and physical capital. When any of these change, the FE line shifts, indicating a new level of long-run output for the economy.

When productivity rises, the FE line shifts to the right. New technology or better management helps workers produce more with the same resources. Each worker becomes more efficient, raising full-employment output to Y-bar 2. If productivity falls, for instance, due to outdated technology or lower efficiency, the FE line shifts to the left.

When the labor force grows due to population increase, skilled immigration, or higher participation, the FE line also shifts to the right. If the labor force shrinks, it shifts left, as potential output falls.

Finally, when businesses invest in more machines, tools, or buildings, the FE line shifts right. But if physical capital is lost, such as through a natural disaster or war, the line shifts to the left.

These are structural changes because productivity growth, labor supply, and capital investment affect long-run production capacity.