Exercises: Measuring Unemployment: Types and Rates

Classify each situation as frictional, structural, or cyclical unemployment. (a) A recent high school graduate in Denver is searching for her first full-time job. (b) A factory worker is laid off because demand for cars collapses during a recession. (c) A coal miner loses his job because the mine closes after power plants switch to other fuels, and he lacks the skills for new jobs.

The labor force of an economy is 160 million people, and 8 million of them are unemployed. Compute the unemployment rate. Write the formula you use.

The adult civilian noninstitutional population is 250 million, and the labor force is 160 million. Compute the labor force participation rate. Name two groups of adults who are not counted in the labor force.

In an economy, the adult population is 240 million, 150 million people are employed, and 10 million are unemployed. (a) Compute the labor force, the unemployment rate, and the labor force participation rate. (b) Suppose 4 million of the unemployed become discouraged and stop looking for work. Recompute the unemployment rate and the participation rate, and explain why the unemployment rate fell even though no one found a job.

The natural rate of unemployment in an economy is 5%. (a) Define the natural rate and say which types of unemployment it includes. (b) If the actual unemployment rate is 7%, how much cyclical unemployment is there, and is real GDP above or below potential? (c) If the actual unemployment rate is 4%, what is the cyclical unemployment rate, and what does that suggest about real GDP relative to potential?

For each policy, identify which type of unemployment it mainly targets and whether it tends to raise or lower the natural rate of unemployment. (a) An online job-search platform run by a state that makes job postings easier to find. (b) A free retraining program for workers displaced by automation. (c) A large increase in the length and generosity of unemployment benefits. Explain each answer briefly.

In month 1, an economy has an adult population of 250 million, a labor force of 160 million, and 152 million employed. During month 2, 3 million employed workers are laid off and begin searching, 1 million unemployed workers become discouraged and leave the labor force, and 2 million people who were not in the labor force start looking for work. No one finds a job during the month and there are no other changes. (a) Compute the unemployment rate and the labor force participation rate in month 1. (b) Compute the number employed, the number unemployed, the labor force, the unemployment rate, and the participation rate in month 2. (c) Explain how a change in the participation rate can move the unemployment rate even when employment does not change.

The official unemployment rate in an economy is 4%. A policy analyst argues that this number is a perfect indicator of labor market health. Evaluate her claim. In your answer, (a) give two reasons the official rate might understate the true amount of labor market weakness, such as discouraged workers and involuntary part-time work, (b) give one reason the official rate might overstate it, and (c) explain why an unemployment rate of 4% can still be consistent with an economy operating below potential output if the natural rate is 3%.