Question

In December 2015, Ames, Iowa, had the lowest unemployment in the United States at 2.2 percent of the workforce. At the other end of the scale was El Centro, California, with 19.6 percent of its workforce unemployed. Source: Forbes, February 9, 2016 In the depth of the 2008–2009 recession, the unemployment rate in Ames peaked at 5.7 percent. In El Centro, it peaked at 30.3 percent.

Use the information provided to estimate how much of the unemployment in Ames and El Centro in 2009 was cyclical and how much was natural. Explain your assumptions in arriving at your estimates.

Answer 1

We assume that the effect of depression on employment was nil in December 2015. In other words we mean that so far as unemployment is concerned the economy had reached normal state in December 2015 and unemployment rate was at its natural level. National unemployment rate at this period was 5.1 and natural rate of unemployment for whole economy was 5.1%.so our assumption is right to some extent as unemployment rate at that time on national level was almost equal to natural rate level

Then since natural rate in Ames is 2.2%. 5.7-2.2 =3.5 was cyclic unemployment. Similarly in lowa 19.6 was natural rate level and 30.3-19.6=10.7% was cyclic unemployment. Note we have assumed seasonal unemployment rate is zero