What is the economic condition when demand for labor exceeds supply, leading to a decrease in unemployment?

The situation described occurs when the demand for labor surpasses the available supply, which results in employers competing for workers, thereby driving wages higher and making it easier for people to find jobs. This dynamic typically signals a healthy economy where businesses are thriving and actively looking to hire, leading to a reduction in unemployment rates.

Full employment is a term that does not mean zero unemployment; rather, it indicates that nearly all individuals who are willing and able to work are able to find employment. In this scenario, the robust demand for labor corresponds with a labor market that is functioning effectively, allowing for a decrease in unemployment levels.

The other terms provided point to different economic conditions: underemployment refers to individuals who are working less than they would prefer, inflation involves a general rise in prices and can occur for various reasons including increased demand, while stagflation describes a scenario where an economy experiences stagnant growth alongside high unemployment and inflation. None of these alternatives capture the essence of the labor market dynamics outlined in the question as well as full employment does.