AP Macroeconomics
Unemployment Problem Set
Define Labor Force in words.
Define Labor Force in an
equation:
What characteristics must
someone meet to be
considered unemployed?
The number of people who are working and who want to work. People
who are working includes people working part-time.
# Employed + # Unemployed
Age 16+, actively seeking a job in the last month
How does one calculate the
unemployment rate?
(# Unemployed / Labor Force) X 100
Define Natural Rate of
Unemployment
Normal rate of unemployment; Includes frictional and structural
unemployment
Define Full Employment
Occurs at the natural rate of unemployment when there is NO CYCLICAL
unemployment
What do economists suggest
the natural rate of
unemployment should be?
Define Frictional
Unemployment
4-6%
Unemployment that results when people are between jobs or looking for
their first job.
Define Structural
Unemployment
Unemployment that occurs when workers’ skills no longer match the
needs of the labor market.
Define Cyclical
Unemployment
Unemployment that follows the business cycle; Occurs when there is a
contraction of the business cycle
Which type of unemployment
must be absent to have full
employment?
Cyclical Unemployment
Define and categorize
seasonal unemployment
Seasonal is a type of frictional (normal) unemployment. Economists do
not worry about this because they know the jobs will come back.
Define and categorize
technological unemployment
Occurs when jobs are replaced by technology (technological
unemployment)
Define Discouraged Worker
Worker who has been without a job so long they have stopped looking
for a job
Occurs when 1) Part-time workers want full-time work; 2) Worker is
overqualified for the job he/she is doing
The unemployment rate is actually much too low. It only includes
people who are actually looking for jobs. It does not include
discouraged workers or underemployed/dissatisfied workers.
Define Underemployment
What are some criticisms of
the way the unemployment
rate is calculated?
Module 12 – Check Your Understanding p.124
#1
The websites would help reduce unemployment over time by helping
people find jobs more quickly. However, the websites that induce people
who have given up looking to re-enter the job search would increase in
the unemployment rate.
#2
a.
b.
c.
d.
e.
Not counted – not looking for work - discouraged worker
Not counted – teacher has a job
Unemployed – actively looking for work
Underemployed- working part-time
Not counted –full time student, but “marginally attached”
** A,D,E – all show labor force underutilization
Item A is consistent – Typically during a fall in Real GDP (contraction of
the business cycle), unemployment will rise
Item B is consistent – As the economy recovers (Rise in Real GDP) more
people tend to find jobs
Item C is inconsistent – If real GDp falls, the unemployment rate typically
rises. KEY IDEA: INVERSE RELATIONSHIP BETWEEN GDP AND
UNEMPLOYMENT
#3
Multiple Choice Questions – p.125
#
1
2
Answer
E
B
3
A
4
D
5
B
Explanation
Definition of unemployed
Labor Force Participation rate is what percentage of the population that is ELIGIBLE for
work is actually in the labor force (whether employed or unemployed). Here, we have a
population of 200,000 people who are age 16+, but we only have a labor force of
100,000. That means that there are 100,000 people who are not employed or
unemployed.
You have a labor force of 100,000. 70,000 people are working full time. 20,000 people
are working part-time. That leaves 10,000 people who must be seeking work.
In #3, you figured out that there are 10,000 people who are in the labor force who are not
employed. 10,000/100,000 X100 = 10% unemployment rate
Discouraged workers are not reflected in the labor force because they are neither
employed nor looking for work.
Tackle the Test: FRQ p. 125
#1
c. Unemployment Rate =
(#Unemployed/Labor Force)X100
a. Labor Force = # Employed +# Unemployed
5 million + 1 million
Labor Force = 6 million
1 million/(5million + 1 million) =
(1 million / 6 million)X 100 = 17%
b. Labor Force Participation Rate =
(Labor Force/ Population)X100
(6 million/12 million)X100 = 50%
#2
a. Julie is employed, but she is
underemployed. Her skills exceed the
requirements for her job.
b. Jeff is not counted as unemployed because
he is no longer looking. He is an example
of a discouraged worker, and is an
example of labor force underutilization.
c. Ian is employed. He has a job and is
content with part-time hours.
d. Raj is not counted in the labor force
because he is not actively working or
seeking employment.
Module 13 – Check Your Understanding p.132
#1
a. Frictional unemployment is always going to exist because people who move from one
job to another will always need time to look for a new job. In addition, there will
always be people who graduate who are looking for a job, and they will need time to
find that job.
b. When the unemployment rate is low, frictional unemployment will account for a
greater percentage of unemployment because structural, and especially CYCLICAL
unemployment will be much lower.
A minimum wage is a price floor that prevents wages from falling to the equilibrium level. As
a result of minimum wage, there will be some workers who will not be able to enter the labor
force because of the artificially high wage. Collective bargaining creates a price floor because
unions insist that wages cannot fall toward equilibrium. Hence, you will have a lot of people
seeking to get a lower number of highly-paid, good union jobs.
#2
#3
If the US greatly increases unemployment benefits, then the unemployed will experience less
cost in being unemployed. They may decide to spend more time looking for a new job. (EX:
Not applying for that seasonal position at Toys R Us so you can spend more time looking for a
job as a real estate agent.) The natural rate of unemployment would increase because people
will take a longer time in finding an ideal job.
Tackle the Test: Multiple Choice Questions p.133
#
1
2
Answer
A
C
3
4
5
B
D
E
Explanation
Definition of frictional unemployment
Definition of cyclical unemployment; Remember, CYCLIcal unemployment follows the
business CYCLE
Skills that the worker is supplying are not needed
The natural rate of unemployment will NEVER be 0% due to frictional unemployment
Ask if you have questions.
Tackle the Test: FRQ p. 133
#2
a. Frictional unemployment. Melanie has
valued skills. She is simply between jobs.
b. Structural. In the global marketplace,
Melanie and her co-workers are
demanding wages above equilibrium. Her
skills can be purchased more cheaply
elsewhere.
c. Cyclical. There is a slump in investment
spending, which is a result of an economic
slow-down. The job will return.
p.153 #13, 15, 18
13. In general, the change in the unemployment rate varies inversely with the rate of
growth in real GDP: when the economy is growing, we expect the unemployment rate to
be falling rapidly. However, after several quarters of a severe recession, unemployed
workers may become discouraged and stop looking for work. Since the definition of
unemployed persons requires that they be looking for work, unemployment falls as
workers become discouraged and stop looking. We could see an increase in the official unemployment
rate after several quarters of a strong expansion as existing workers,
encouraged by an increase in wages to attract new workers, leave existing jobs to search
for new ones and discouraged workers begin to search for jobs again.
15.
a. To find the number of people employed in each region, you would complete the following for each:
Labor Force – Number Unemployed
To find the third column (Change), simply do the following: March 2008 data- March 2007 data
Region
Northeast
South
Midwest
West
March 2007
26,665.7
51,902.9
33,106.1
33,643.8
Employed (thousands)
March 2008
26,685.3
52,300.1
33,177.8
33,988.9
Change
19.6
397.2
71.7
345.1
b. To calculate labor force growth for each region, complete the following:
Labor Force March 2008 – Labor Force March 2007
Region
Growth in the Labor Force (thousands)
Northeast
172.1
South
670.1
Midwest
224.3
West
671.5
c. The unemployment rate is calculated as (number unemployed/labor force)X100
Unemployment Rate
Region
Northeast
South
Midwest
West
March 2007
4.3%
4.2%
4.9%
4.5%
March 2008
4.8%
4.7%
5.3%
5.3%
d. Across the different regions of the United States, more people were employed in March 2008
than in March 2007. However, the unemployment rates increased because an even larger
number of people were in the labor force, seeking jobs.
18. a. The job-for-life system of employment in Japan led to a very low level of
frictional unemployment. The only search for jobs occurred when workers first joined the
labor force. The low level of frictional unemployment led to a low natural rate of
unemployment. Since the stock market crash of 1989 and the slow economic growth of
the 1990s, Japan has moved away from the job-for-life system. As some Japanese firms
laid off workers who believed they had their jobs for life, it was difficult for many to find
new jobs. Consequently, frictional unemployment has risen in Japan, leading to a higher
natural rate of unemployment.
b. The increase in real GDP growth should result in a decrease in the unemployment rate
in Japan. Indeed, the unemployment rate has dropped from 5.3% in 2003 to 3.9% in
2007. The likely cause of this is a decrease in the cyclical unemployment rate. The
increase in real GDP growth indicates that the Japanese economy has expanded during
this period.