Question

a. a. Suppose that 98 million people work and 5 million seek work. What is the unemployment rate?

b. b. Now suppose that the economy goes into a recession and 3 million people are laid off and seek work while 4 million give up searching for work due to discouragement. Refer to part (a) to calculate the new unemployment rate.

c. c. Go back to part (a). Suppose that 7 million of the employed switch to underground economy jobs (legal or illegal) and half of them report that they don’t work and not looking for a job, while the other half reports that they don’t work but looking for a job. Calculate the unemployment rate.  

d. d. Compare, contrast and explain your answers in parts (b) and (c) to part (a). Based on the unemployment rates that you calculated in parts (b) and (c), and if unemployment rates are “key” indicators of macroeconomic performance and growth, is the economy performing better, worse or the same? Are the calculated unemployment rates a reliable measure to assess the country’s economic performance? For instance, do these rates accurately reflect economic or job market conditions? Please explain and interpret your results.

Answer 1

ANSWER:

a) Labor force = Employed people + Unemployed people.(those who seeking for work).

= 98 million + 5 million.

= 103 million.

=> Unemployment rate = Unemployed / labor force.

= ( 5 / 103 ) * 100

= 0.0485 * 100

= 4.85 %

b) Here, 3 million are laid off,i.e unemployment truns as 5 million + 3 million = 8 million.

Also said thhat 4 million gave up searching the work. Hence, both of the labor force and the unemployment decreases by 4 million. Hence,

==> The New Labor force = 103 million - 4 million = 99 million.

*New unemployment = 8 million - 4 million= 4 million

=>New Unemployment rate = (Unemployed / Labor force).

= ( 4 / 99 ) * 100.

= 0.0404 * 100.

= 4.04 %.

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