Question

Consider a hypothetical economy, which has a working age population of 20,000 people. Of these, 15,000 are in the labour force. The unemployment rate is currently 12%. Now assume that demand has fallen during a recession, and firms have to lay off some of their workers. Option A involves firms reducing the number of hours each person works from 40 hours per week to 32 hours per week. Option B involves firms sacking 20% of their workers. What would the unemployment rate now be under each scenario?

Answer 1

Before the change, population was 20000, labor force was 15000, employed = 88% = 13200, unemployed = 12% = 1800. Hence unemployment rate = 12%

Option A - After the change, reduction in total working hours = (40 - 32)*13200 = 105600. This is equivalent to a job loss of 105600/40 = 2640. Hence new unemployment rate = (1800 + 2640)*100/15000 = 29.6%

Option B - After the change, reduction in employed = 20% = 20%*13200 = 2640. Hence agian the new unemployment rate = (1800 + 2640)*100/15000 = 29.6%