Introduction to Macroeconomics

6. Unemployment and Labor Markets - Sample Problems

Contents

1. Measurement
2. Underemployed and Discouraged
3. Types of Unemployment
4. Natural Rate of Unemployment
5. Government Policies

1. Measurement

1. The unemployment rate represents
1. age 16 or older who are not institutionalized, and who are not working but are available for work and actively seeking a job.
2. the sum of all people who are unemployed or employed.
3. the number unemployed / the civilian population older than 16 years of age and older.
4. (the number unemployed + employed) / U.S. noninstitiutionalized population older than 16 years of age.
5. the number unemployed / (the number employed + unemployed).
6. the percentage of the labor force that is unemployed.
7. the percentage of the civilian noninstitutionalized population over 16 years old that is unemployed.

Answer: (E), and (F). Answer (A) is the definition of who is counted as unemployed. Answers (C) and (G) are incorrect because they have the total population rather than the labor force as the denominator. This question could also have asked what represents the total labor force (answer B) the labor force participation rate (answer D). Note that answer (E) represents a fraction while (F) is stated as a percentage. Either are correct as an unemployment "rate". Rates are traditionally reported as percentages so just multiply the numerical answer to (E) by 100 to convert to percentage.

2. Which of the following individuals is counted as an unemployed worker in the United States?
1. An individual who works part time but would like to work full time.
2. A worker who has quit looking for work because he or she is convinced that no jobs are available.
3. An individual who in the past month actively looked for work without finding it.
4. A person working in the home without pay.
5. a full-time student not looking for a job.
6. someone who has recently graduated from college, and is looking for his or her first full-time job.
7. convicts in prisons.
8. someone who has just retired at age 65.
9. members of the military.

Answer: (C) and (F). The other options can be classified as:

• (G) and (I) - not counted as part of the civilian noninstitutional population and not included in labor force statistics.
• (B), (D), (E), and (H) - part of the civilian noninstitutional population but not counted as part of the labor force. Note that the individual in answer (B) is often described as a "discouraged" worker.
• (A) - counted as employed. This individual is also described as "underemployed".

Because of discouraged workers and underemployed the reported unemployment rate may not accurately reflect the true unemployment rate.
3. Suppose the country of Tancred has a civilian noninstitutional population age 16 or older of 1,000 individuals with 400 employed and 100 unemployed. Given this information, which of the following statements is false?
1. The labor force consists of 500 people.
2. Discouraged workers are included in the "not in the labor force" category.
3. The labor force participation rate is 50 percent.
4. The unemployment rate is 10 percent, and the labor force participation rate is 50 percent.
5. The unemployment rate is 20 percent, and the labor force participation rate is 40 percent.

Answer: (C), (D), and (E). The labor force is 500 people (400 employed + 100 unemployed). The labor force particpation rate is 50 percent (500 labor force / 1000 civilian noninstitutional population age 16 or older), and the unemployment rate is 20 percent (100 unemployed / 500 labor force).

2. Underemployed and Discouraged

1. Tancred, who has been without a job for 4 months, decides to stop searching for employment. According to the Bureau of labor Statistics, Tancred is counted as
1. part of the labor force but underemployed.
2. part of the employed labor force.
3. part of the unemployed labor force.
4. unemployed but not part of the labor force.
5. a discouraged worker who is neither unemployed nor part of the labor force.

Answer: (E). To be counted as unemployed and part of the labor force Tancred must still be actively looking for work. Answer (A) would be the correct answer to a question that suggested Tancred was employed part-time as a teacher but has been looking for a full-time job for the last month.

3. Types of Unemployment

1. Cyclical Unemployment is best characterized by a worker who:
1. quits because he hates his boss.
2. is laid off because he or she is replaced by a robot.
3. is laid off because of a recession.
4. is laid off by a department store just after the Christmas holidays end.
5. is laid off by Boeing Co. because General Dynamics took over the government contract she was working on.

Answer: (C). Answer (A) represents frictional unemployment. Answers (B) and (E) represent structural unemployment while answer (D) is seasonal unemployment. Our macroeconomic models focus on cyclical unemployment because there is a role for government action, which generally does not exist in cases of frictional, structural, or cyclical unemployment. Congress may act aggressively to stimulate the economy during recessions and lower cyclical unemployment such as through tax cuts or increased government spending.

4. Natural Rate of Unemployment

1. If the actual rate of unemployment exceeds the natural rate of unemployment, what happens to the production possibilities frontier?

   Answer: If the rate of unemployment rises above the natural rate of unemployment then the economy is operating at a point inside of the production possibilities curve rather than on the curve. There is an underutilization of resources. Nothing happens to the production possibilities curve, however.

5. Government Policies

1. It's an election year and Congress votes to increase unemployment insurance benefits. What impact on the natural rate of unemployment and the actual unemployment rate?
1. increase the natural rate of unemployment and increase the actual unemployment rate.
2. increase the natural rate of unemployment and reduce the actual unemployment rate.
3. reduce the natural rate of unemployment and increase the actual unemployment rate.
4. reduce the natural rate of unemployment and reduce the actual unemployment rate.

Answer: (A). With higher unemployment benefits the opportunity cost of not having a job is reduced. Those who are unemployed will likely remain unemployed for a longer duration and the unemployment rate will increase. Moreover, since those in the structural and seasonal unemployment categories are included (frictionally unemployed would not be eligible for benefits if they left their jobs voluntarily) the natural rate of unemployment would also go up. We could have asked a similar question regarding the effect of an increase in the minimum wage (a similar result).

File last modified: May 1, 2003

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