AP Unemployment Questions
1. Explain the following statements:
a. Frictional unemployment always exists.
Frictional unemployment is unemployment due to the time workers spend
searching for jobs. It is inevitable because workers may leave one job in search
of another for a variety of reasons. Furthermore, there will always be new
entrants into the labor force who are seeking a first job. During the search
process, these individuals will be counted as part of the frictionally unemployed.
b. Frictional unemployment accounts for a larger share of total unemployment when the
unemployment rate is low.
When the unemployment rate is low, frictional unemployment will account for a
larger share of total unemployment because other sources of unemployment will
be diminished. So the share of total unemployment composed of the frictionally
unemployed will rise.
2. Explain how cyclical unemployment relates to the natural rate of unemployment.
Cyclical unemployment is the deviation of the actual rate of unemployment from
the natural rate of unemployment. Or, cyclical unemployment is the difference
between the actual and natural rates of unemployment.
3. In each of the following situations, what type of unemployment is Mitzi facing? Explain.
a. After completing a complex programming project, Mitzi is laid off. Her prospects for a
new job requiring similar skills are good, and she has signed up with a programmer
placement service. She has passed up offers on jobs that are low-paying.
Mitzi is frictionally unemployed. She is simply between jobs and has
transferrable skills that can lead to a new position.
b. When Mitzi and her co-workers refused to accept pay cuts, her employer outsourced
their programming to workers in another country. This phenomenon is occurring
throughout the programming industry.
Mitzi is structurally unemployed because wages are not at market equilibrium.
c. Due to the current slump in investment spending, Mitzi has been laid off from her
programming job. Her employer promises to rehire her when business picks up.
Mitzi is cyclically unemployed. She is unemployed due to an economic
contraction.
4. Complete the newspaper headline: “Unemployment 5% above Normal. GDP has likely fallen by
_________”. What is the name of the principal you used to complete the headline?
According to Okun’s Law, GDP will have likely fallen by 10%.
5. How will the following changes affect the natural rate of unemployment? Explain.
a. The government reduces the time during which an unemployed worker can receive
benefits. If the government reduces the time during which an unemployed worker can
obtain benefits, workers will be less willing to spend time searching for a job. This will
reduce the amount of frictional unemployment and lower the natural rate of
unemployment.
b. More teenagers focus on their studies and do not look for jobs until after college.
Since teenagers have a higher rate of frictional unemployment, this will lower the
overall amount of frictional unemployment and lower the natural rate of unemployment.
c. Greater access to the Internet leads both potential employers and potential employees
to the Internet to list and find jobs.
Greater access to the Internet would facilitate job searches, reducing frictional
unemployment and lowering the natural rate of unemployment.
d. Union membership declines.
Since strong unions negotiate wages above the equilibrium level, they are a source of
structural unemployment. A decline in union membership will reduce structural
unemployment and, with it, the natural rate of unemployment.
6. Use the data below to answer the following questions:
Working Age Population
50 million
Number Employed
25 million
Number Working Full-Time
20 million
Number Unemployed
2 million
a. Calculate the labor force participation rate:
(27 million / 50 million) X 100 = 54%
b. Calculate the unemployment rate:
(2 million/27 million) X 100 =7.4%
c. What are some potential problems with this data? In other words, what problems might it
not reflect? It does not reflect discouraged workers, the underemployed, or those working
illegally. This data also gives no information regarding unemployment levels of specific
demographics.
7.
Assume that we see major signs that the economy is improving, yet the unemployment rate
actually ticks up by a percent. Why might this NOT be a bad sign? What information might you
need to determine if this rise in unemployment is a good sign or a bad sign for the economy?
When an economy starts to improve, more people enter the labor force and begin looking for
jobs, and we will therefore have more unemployed workers. This could have the effect of raising
the unemployment rate. In addition, people who are underemployed or dissatisfied with their
jobs may feel confident that they can find a new job. To better understand if this is a sign of a
recovering economy, we need to know how many new jobs are created, how many people
obtained new jobs, and how many people are applying for unemployment benefits for the first
time. If the numbers on the job data are positive, that is a sign that the economy is actually
improving.