Lecture 5 – Unemployment

SECTION I SHORT ANSWER QUESTION

Question 1
The Bureau of Labor Statistics reported in 2005 that there were 53.23 million people over age 25
who had at least a bachelor’s degree, 40.59 million of whom were employed and .98 million of
whom were unemployed.

a. How is the labor force defined, and who measures it? How is the unemployment rate
calculated?
- Labor-force participation rate: the percentage of the adult population that is in the
labor force
- Unemployment is measured by Bureau of Labor Statistics (BLS), part of the U.S.
Dept. of Labor.
▪ Based on regular survey of 60,000 households
▪ Based on “adult population” (16 yrs or older)
- The unemployment rate is calculated as the percentage of the labor force that is
unemployed.
b. Calculate the labor-force participation rate and the unemployment rate

Question 2
Given the following information about the Labor Data for Wrexington in 2009.

Number of adults 20,000

Number of adults who are paid employees 8,000 E
Number of adults who work in their own businesses 1,600 E
Lecture 5 – Unemployment

Number of adults who are unpaid workers in a family member’s business 1,000 E
Number of adults who were temporarily absent from their jobs because of an 400 E
earthquake
Number of adults who were waiting to be recalled to a job from which they had 200 U
been laid off
Number of adults who do not have a job, are available for work, and have tried to 1,400 U
find a job within the past four weeks
Number of adults who do not have a job, are available for work, but have not No780
tried to find a job within the past four weeks t
Number of adults who are full-time students 3,000 No
t
Number of adults who are homemakers or retirees 3,620 No
t
a. How is the labor force defines, and who measures it? How is the unemployment rate
calculated?

Labor force:

- Employed: paid employees and those working in their own businesses. E

- Unemployed but are actively looking for work and are available to work. U

Measurement:

- By national statistical agencies the Bureau of Labor Statistics (BLS) in the U.S

b. How many people were unemployed, labor force and not in labor force in Wrexington in
2009?
- Unemployed: 1,600 people
- Employed: 12,800 people
- Not in the labor force: 7,400 people.
c. What was Wrexington’s unemployment rate and labor force participation rate in 2009?
- Unemployed rate : 1,600/ 12,800 * 100 = 12.5%

- adult population = 20,000

Lecture 5 – Unemployment

- Labor force participation rate = 12,800/20,000 * 100 = 64%

Question 3
In 2004, based on concepts similar to those used to estimate U.S. employment figures, the
Canadian adult non-institutionalized population was 25.022 million, the labor force was 16.956
million, and the number of people employed was 15.864 million. According to these numbers,
Calculate the Canadian labor-force participation rate and unemployment rate.

Labor Force Participation Rate:

- Labor force = 16,956 million

- Adult population: 25,022 million.

Labor force participation rate = 16,956/25,022 *100 = 67.8%

Unemployment Rate:

- Number of Employed: 15.864 million

- Labor Force: 16.956 million

Number of Unemployed=16,956 million−15,864 million=1,092 million

Unemployment Rate=16.956 / 1.092 ×100 = 6.4%

Question 4
Consider two people who are currently out of work. Tim is not looking for work because there
have been many job cuts where he lives, and he doesn't think he will likely find work. Bev is not
currently looking for work, but she would like a job and has looked for work. Identify marginally
attached workers who the Bureau of Labor Statistics considers.

Question 5
Why is frictional unemployment inevitable? How might the government reduce the amount of
frictional unemployment?

- Frictional unemployment occurs when workers spend time searching for the jobs that
best suit their skills and tastes, and short-term for most workers.
- Government programs may help to facilitate job search and reduce unemployment.
These programs include the following:
• Government-run employment agencies
• Public training programs
• Unemployment insuranc
Lecture 5 – Unemployment

Question 6
Jenny is looking for work as a computer programmer. Although her prospects are good, she has
not yet taken a job. Suly is looking for work in a steel mill. Every time she shows up for an
interview, more people are looking for work than their openings. Someone waiting in line with
her tells her it has been that way for a long time.
a. What is frictional unemployment and structural unemployment?
- Frictional unemployment occurs when workers spend time searching for the jobs that
best suit their skills and tastes, and short-term for most workers.
- Structural unemployment occurs when there are fewer jobs than workers, and usually
longer-term
b. Identify who is considered frictional unemployment and structural unemployment.
- Jenny: Frictional Unemployment
- Suly: Structural Unemployment

Question 7
Why might a favorable change in the economy, such as technological improvement or a decrease
in the price of imported oil, be associated with an increase in frictional unemployment?

Question 8
Bob is looking for work after school, but everywhere he fills out an application, the managers
say they always have a lot more applications than open positions. Tom has a law degree. Several
firms have made him offers, but he thinks he might be able to find a firm where his talents could
be put to better use.

a. What is frictional unemployment and structural unemployment?

b. Identify who is considered frictional unemployment and structural unemployment
Question 9
Civilian labor force 100 million
Persons unemployed 15 weeks or longer 1.6 million
Job losers and persons who have completed temporary jobs (excludes job leavers) 3.1 million
Total unemployed 6.2 million
Total unemployed plus discouraged workers 7.0 million
Total unemployed plus all marginally attached workers 8.1 million
Total unemployed plus all marginally attached workers plus total employed part-
time for economic reasons 9.2 million
a. What is the U-3 measure of labor underutilization?
Lecture 5 – Unemployment

U-3 Unemployment Rate= Total Unemployed / Civilian Labor Force × 100

= 6.2 million / 100 million*100 = 6.2%

b. What is the U-4 measure of labor underutilization?

U-4 Unemployment Rate = Total Unemployed + Discouraged Workers / Civilian Labor Force +
Discouraged Workers × 100

= 6.2 million+0.8 million / 100.8 million7.0 million × 100 = 6.94%

c. What is the U-5 measure of labor underutilization?

U-5 Unemployment Rate = Total Unemployed + All Marginally Attached Workers /

Ciilian Labor Force + All Marginally Attached Workers ×100

= 8.1 million / 100 million+1.9 million × 100 = 7.96%

d. What is the U-6 measure of labor underutilization?

U-6 Unemployment Rate = Total Unemployed + All Marginally Attached Workers +

Employed Part-Time for Economic Reasons / Civilian Labor Force +
All Marginally Attached Workers ×100

= 9.2 million / 100 million + 1.9 million * 100 = 9.03%

Question 10
Suppose that there is an excess supply of economics professors. Should universities necessarily
reduce salaries? What does standard economic theory suggest? What does efficiency-wage
theory suggest?

SECTION II MULTIPLE CHOICE QUESTIONS

Question 1 If minimum-wage laws, unions, efficiency wages, and all other factors that
could prevent wages from reaching equilibrium were eliminated, then there would be
no
a. cyclical unemployment.
b. frictional unemployment.
c. structural unemployment.
d. natural rate of unemployment.
Lecture 5 – Unemployment

Question 2 Consumers decide to buy more computers and fewer typewriters. As a

result, computer companies expand production while typewriter companies lay-off
workers. This is an example of
a. frictional unemployment created by efficiency wages.
b. frictional unemployment created by sectoral shifts.
c. structural unemployment created by efficiency wages.
d. structural unemployment created by sectoral shifts.

Question 3 In 2002, the demand for construction workers increased and the demands for
textile and steel workers diminished. This is an example of
a. frictional unemployment created by efficiency wages.
b. structural unemployment created by efficiency wages.
c. frictional unemployment created by sectoral shifts.
d. structural unemployment created by sectoral shifts.

Question 4 Cyclical unemployment refers to

a. the relationship between the probability of unemployment and a worker's changing level
of experience.
b. how often a worker is likely to be employed during her lifetime.
c. year-to-year fluctuations of unemployment around its natural rate.
d. long-term trends in unemployment.

Question 5 The Bureau of Labor Statistics places people in the “employed” category if
they
a. are without a job, but are available for work and have tried to find a job during the
previous 4 weeks.
b. work without pay in a family member’s business.
c. are waiting to be recalled to a job from which they had been laid off.
d. All of the above are correct.

Question 6 Suppose that some people are counted as unemployed when, to maintain
unemployment compensation, they search for work only at places where they are
unlikely to be hired. If these individuals were counted as out of the labor force
instead of as unemployed, then
a. both the unemployment rate and labor-force participation rate would be higher.
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be lower and the labor-force participation rate would be
higher.
Lecture 5 – Unemployment

d. the unemployment rate would be higher and the participation rate would be lower.

Question 7 Who would be included in the labor force?

a. Homer, who is waiting for his new job to start
b. Michelle, who has become discouraged looking for a job and has quit looking
c. Derrick, an unpaid homemaker
d. None of the above would be included in the labor force.

Question 8 People who are unemployed because wages are, for some reason, set above
the level that brings labor supply and demand into equilibrium are best classified as
a. cyclically unemployed.
b. structurally unemployed.
c. frictionally unemployed.
d. discouraged workers.

Question 9 Which of the following is not an explanation for the existence of

unemployment in the long run?
a. it takes time for workers to search for the jobs that are best suited for them
b. minimum-wage laws
c. unions
d. the business cycle

Question 10 Which of the following is not correct?

a. Frictional unemployment results from the process of matching workers and jobs.
b. Structural unemployment results when the number of jobs is insufficient for the number
of workers.
c. Minimum wages are the predominant reason for unemployment in the U.S. economy.
d. When a minimum-wage law forces the wage to remain above the level that balances
supply and demand, it raises the quantity of labor supplied and reduces the quantity of
labor demanded compared to the equilibrium level.

Question 11 When a minimum-wage law forces the wage to remain above the level that
balances supply and demand, there are
a. more workers willing to work than there are jobs, so some workers are unemployed.
b. fewer workers willing to work than there are jobs, so some workers are unemployed.
c. more workers willing to work than there are jobs, so unemployment decreases.
d. fewer workers willing to work than there are jobs, so unemployment decreases.
Lecture 5 – Unemployment

Question 12 Quinn, the CEO of a corporation operating in a relatively poor country

where wages are low, decides to raise the wages of her workers even though she faces
an excess supply of labor. Her decision
a. might increase profits if it means that the wage is high enough for her workers to eat a
nutritious diet that makes them more productive.
b. will help eliminate the excess supply of labor.
c. may cause her workers to increase shirking.
d. All of the above are correct.

Question 13 For the Bureau of Labor Statistics to place someone in the “unemployed”
category, that person must
a. have worked 10 or fewer hours during the previous week.
b. have tried to find employment during the previous year.
c. not have been laid off.
d. None of the above is correct.

Question 14 Tom is on a temporary layoff from his factory job. The Bureau of Labor
Statistics counts Tom as
a. unemployed and in the labor force.
b. unemployed and not in the labor force.
c. employed and in the labor force.
d. employed and not in the labor force.

Question 15 Maria just graduated from college. In order to devote all her efforts to
college, she didn’t hold a job. She is going to cruise around the country on her
motorcycle for a month before she starts looking for work. Other things the same,
the unemployment rate
a. increases and the labor-force participation rate decreases.
b. and the labor-force participation rate both increase.
c. increases and the labor-force participation rate is unaffected.
d. and the labor-force participation rate are both unaffected.

Question 16 Suppose that some country had an adult population of about 46 million, a
labor-force participation rate of 75 percent, and an unemployment rate of 8 percent.
How many people were unemployed?
a. 2.54 million
b. 2.76 million
c. 3.68 million
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d. 8 million

Question 17 Government-run employment agencies, public training programs and

unemployment insurance are public policies to deal with _____in the_____
a. frictional unemployment, long-term.
b. structural unemployment, short-term.
c. frictional unemployment, short-term.
d. structural unemployment, long-term.

Question 18 In 2004, based on concepts similar to those used to estimate U.S. employment
figures, the Japanese adult non-institutionalized population was 109.684 million, the
labor force was 65.760 million, and the number of people employed was 62.630
million. According to these numbers, the Japanese labor-force participation rate and
unemployment rate were about
a. 57.1% and 2.9%.
b. 57.1% and 4.8%.
c. 60% and 2.9%.
d. 60% and 4.8%.

Question 19 Sectoral changes

a. create frictional unemployment, while firms paying wages above equilibrium to attract a
better pool of candidates creates structural unemployment.
b. create structural unemployment, while firms paying wages above equilibrium to attract a
better pool of candidates creates frictional unemployment.
c. and firms paying wages above equilibrium to attract a better pool of candidates both
create structural unemployment.
d. and firms paying wages above equilibrium to attract a better pool of candidates both
create frictional unemployment.
Lecture 5 – Unemployment

Question 20 Figure 1: At the equilibrium wage, how many workers are unemployed?

a. 0
b. 4000
c. 5000
d. 8000

Question 21 Refer to 1. If the government imposes a minimum wage of $4, then how
many workers will be employed?
a. 3000
b. 4000
c. 5000
d. 7000

Question 22 Refer to 1. If unemployment is 2000 workers, then the minimum wage must
be
a. $4.
b. $5.
c. $7.
d. $8.

Question 23 Other things the same, an increase in wages above their equilibrium level
a. increases frictional unemployment but leaves the natural rate of unemployment
unchanged.
b. increases frictional unemployment and increases the natural rate of unemployment.
Lecture 5 – Unemployment

c. increases structural unemployment but leaves the natural rate of unemployment

unchanged.
d. increases structural unemployment and increases the natural rate of unemployment.

Question 24 If the natural rate of unemployment is 5.2 percent and the actual rate of
unemployment is 5.7 percent, then by definition there is
a. cyclical unemployment amounting to 0.5 percent of the labor force.
b. frictional unemployment amounting to 0.5 percent of the labor force.
c. structural unemployment amounting to 0.5 percent of the labor force.
d. search unemployment amounting to 0.5 percent of the labor force.

Question 25 From time to time, the demand for workers has risen in one region of the
United States and fallen in another. This illustrates
a. frictional unemployment created by efficiency wages.
b. structural unemployment created by efficiency wages.
c. frictional unemployment created by sectoral shifts.
d. structural unemployment created by sectoral shifts.

Question 26 The efficiency-wage theory of worker turnover suggests that firms with
a. higher turnover will have higher production costs and higher profits.
b. higher turnover will have higher production costs and lower profits.
c. higher turnover will have lower production costs and higher profits.
d. higher turnover will have lower production costs and lower profits.

Question 27 When a minimum-wage law forces the wage to remain above the level that
balances supply and demand, it
a. raises the quantity of labor supplied and raises the quantity of labor demanded compared
to the equilibrium level.
b. raises the quantity of labor supplied and reduces the quantity of labor demanded
compared to the equilibrium level.
c. reduces the quantity of labor supplied and raises the quantity of labor demanded
compared to the equilibrium level.
d. reduces the quantity of labor supplied and reduces the quantity of labor demanded
compared to the equilibrium level.

Question 28 Which of the following is not correct?

a. Frictional unemployment results from the process of matching workers and jobs.
b. Structural unemployment results when the number of jobs is insufficient for the number
of workers.
c. Minimum wages are the predominant reason for unemployment in the U.S. economy.
Lecture 5 – Unemployment

d. When a minimum-wage law forces the wage to remain above the level that balances
supply and demand, it raises the quantity of labor supplied and reduces the quantity of
labor demanded compared to the equilibrium level.

Question 29 Unemployment insurance

a. reduces the hardship of unemployment, but it also increases the amount of
unemployment.
b. reduces the incentive for the unemployed to find and take new jobs.
c. causes workers to be less likely to seek guarantees of job security when they negotiate
with employers over the terms of employment.
d. All of the above are correct.

Question 30 Which of the following does not help reduce frictional unemployment?
a. government-run employment agencies
b. public training programs
c. unemployment insurance
d. All of the above help reduce frictional unemployment.