Frictional unemployment is the unemployment that arises from the normal labor turnover from people entering and leaving the labor force and from the ongoing creation and destruction of j
Trang 1A n s w e r s t o t h e R e v i e w Q u i z z e s
Page 150 (page 558 in Economics)
1 What determines if a person is in the labor force?
Workers who have a job and workers who are unemployed are in the labor force To
be “officially” counted as unemployed, and thus in the labor force, means that the person does not have a job but is available and willing to work and has made some effort to find work within the past four weeks, or waiting to be called back to
a job from which he or she has been laid off, or waiting to start a new job within 30 days
2 What distinguishes an unemployed person from one who is not in the labor force?
A general definition of unemployment is a person who wants to work but does not have a job A person who is not in the labor force does not have a job and does not want one More specifically to be considered as unemployed, and thus in the labor force, the person must not have a job but must be available and willing to work The person must also have made some effort to find work within the past four weeks, or be waiting to be called back to a job from which he or she has been laid off, or be waiting to start a new job within 30 days
3 Describe the trends and fluctuations in the U.S unemployment rate from
1980 to 2014
The unemployment rate has had several significant fluctuations around its
average of 6.5 percent It started by soaring to a high that exceeded 10 percent during the 1982 recession Then there was a gradual downward trend particularly insofar as the peaks during the recessions in 1990-1991 and 2001 were much lower than in 1982 But that situation reversed itself with the severe and prolonged recession of 2008-2009 when the unemployment once more jumped (slightly) above 10 percent Since that peak the unemployment rate has fallen to around 6 percent
69
Trang 24 Describe the trends and fluctuations in the U.S employment-to-population ratio and labor force participation rate from 1980 to 2014
The labor force participation rate and the employment-to-population ratio had an upward trend from 1980 until about 2000 after which they turned downward Both show fluctuations around these trends, especially the employment-to-population ratio which rises during expansions and falls during recessions but its fall between
2008 and 2010 was particularly severe The labor force participation rate also fell between 2008 and 2010 but the fall was not as dramatic Recently the labor force participation rate has been near 63 percent and the employment-to-population ratio has been near 59 percent
70
Trang 3 U-1 measures long-term unemployment It counts as unemployed only workers who have been unemployed for 15 or more weeks
U-2 measures job losers; that is, only workers who lost their jobs (as
opposed to quitting or reentering the labor market) are counted as unemployed
U-3 is the conventional measure of unemployment
U-4 adds discouraged workers to the conventional measure of
unemployment
U-5 adds all marginally attached workers to the U-4 measure of
unemployment
U-6 adds time workers who would like a full-time job (economic part-time workers) to the U-5 measure of unemployment
Page 153 (page 561 in Economics)
1 Why does unemployment arise and what makes some unemployment
unavoidable?
In a dynamic economy some unemployment is unavoidable For instance, growth means that some workers will always be entering the labor force without a job and therefore be unemployed Consumers changing their demand for one good over another means workers in the newly less-favored industry will lose their jobs and also be unemployed Moreover some workers will always be leaving their current job to search for a better job and these workers, too, will be unemployed So some unemployment is unavoidable as the economy churns and reacts to changes
2 Define frictional unemployment, structural unemployment, and cyclical
unemployment Give examples of each type of unemployment
Frictional unemployment is the unemployment that arises from the normal labor turnover from people entering and leaving the labor force and from the ongoing creation and destruction of jobs For instance, newly graduated students entering the labor market looking for work are frictionally unemployed Structural
unemployment represents the unemployment created by changes in technology or international competition that change the skills needed to perform jobs or change the locations of jobs in the economy For instance, workers are structurally
unemployed if they lose their jobs because of changes in the amount of foreign competition and if they have different skills from those required by new jobs or if they live in a different region of the country from where new jobs are being
created Finally, cyclical unemployment is the unemployment created by business cycle fluctuations in economic activity Specifically the higher than normal
unemployment at a business cycle trough and the lower than normal
unemployment at a business cycle peak is called cyclical unemployment For instance, a worker laid off in 2009 because of the recession is cyclically employed
3 What is the natural unemployment rate?
The natural unemployment rate is the unemployment rate when no cyclical
unemployment exists That is, when all unemployment is frictional or structural then the unemployment rate equals the natural unemployment rate Full
employment occurs when there is no cyclical unemployment and the
unemployment rate equals the natural unemployment rate
Trang 44 How does the natural unemployment rate change and what factors might make it change?
Changes in the natural unemployment rate arise because of changes in frictional and structural unemployment Any factor that changes frictional unemployment or structural unemployment changes the natural unemployment rate For instance, a change in the age distribution of the population, a change in the scale of structural changes that are occurring, a change in the minimum wage rate or efficiency wages, or a change in unemployment benefits all change the natural
unemployment rate
5 Why is the unemployment rate never zero, even at full employment?
The unemployment rate is never zero because there is always churning going on the economy There are always new workers entering the labor market and
searching for work, there are always workers leaving one job to search for another, better job, and there are always firms laying off workers All these cases lead to unemployment as the workers search for a job
6 What is the output gap? How does it change when the economy goes into recession?
The output gap equals the difference between real GDP and potential GDP When the economy goes into a recession, the output gap becomes negative
7 How does the unemployment rate fluctuate over the business cycle?
During a recession the unemployment rate is generally rising During an expansion the unemployment rate is generally falling
Page 159 (page 567 in Economics)
1 What is the price level?
The price level is the average level of prices
2 What is the CPI and how is it calculated?
The CPI is the Consumer Price Index The CPI equals (Cost of CPI basket at current prices ÷ Cost of CPI basket at base-period prices) ×100
3 How do we calculate the inflation rate and what is its relationship with the CPI?
The inflation rate is the percentage change in a price index from one year to the next The rate of change of the CPI is often used as a measure of inflation as faced
by consumers
4 What are the four main ways in which the CPI is an upward-biased measure of the price level?
The CPI is biased upward because of the new goods bias; the quality change bias; commodity substitution bias; and outlet substitution bias The new goods bias reflects the point that new goods, such as DVDs are generally more expensive than the old goods they replace, VHS tapes The quality change bias points out that part
of the reason goods and services rise in price is because their quality is improved Commodity substitution bias occurs because consumers substitute away from goods and services that have risen in the price more than other goods and
services Outlet substitution bias occurs because consumers will use discount stores more frequently when goods and services rise in price
5 What problems arise from the CPI bias?
The upward bias in the CPI distorts private contracts and government outlays that include formulas based on CPI change as a measure of inflation If the intent is to
Trang 5maintain the real value of a payment, indexing payments to the CPI will in fact
increase the real value of payments over time if the CPI has an upward bias In one year, the effect of the bias may not be much, but it will accumulate over time
Close to one third of federal government outlays are indexed to the CPI
6 What are the alternative measures of the price level and how do they address the problem of bias in the CPI?
The first of three alternative price level is the chained CPI The chained CPI is
calculated in a similar manner as chained-dollar real GDP The chained CPI
overcomes the commodity substitution and new goods bias because it uses current
as well as previous period quantities The second alternative price level is the
personal consumption expenditure deflator or PCE deflator The PCE deflator is
calculated from real and nominal consumption expenditure The PCE deflator uses
a broader basket of goods and services than the CPI and, similar to the chained
CPI, is also calculated using a chained method The third alternative is the GDP
deflator The GDP deflator is similar to the PCE deflator except the GDP deflator
uses the prices from all the goods and services included in GDP
Trang 6A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d
A p p l i c a t i o n s
1 The BLS reported the following data for 2010:
Labor force: 153.7 million
Employment: 139.1 million
Working-age population: 237.9 million
Calculate the
a Unemployment rate
The unemployment rate is 9.5 percent The unemployment rate is the percentage
of the labor force that is unemployed The labor force is the sum of the people unemployed and the people employed So the number of people who are
unemployed is 153.7 million minus 139.1 million, which is 14.6 million The
unemployment rate equals (the number of people unemployed divided by the labor force) multiplied by 100 That is, (14.6 million/153.7 million) 100, which is 9.5 percent
b Labor force participation rate
The labor force participation rate is 64.6 percent The labor force participation rate
is the percentage of the working-age population that is in the labor force The working-age population is 237.9 million and the labor force is 153.7 million, so the labor force participation rate is (153.7 million/237.9 million) 100, which equals 64.6 percent
c Employment-to-population ratio
The population ratio is 58.4 percent The
employment-to-population ratio is the percentage of the people of working age who have jobs The employment-to-population ratio is equal to the number of people employed divided
by the working-age population then multiplied by 100 The
employment-to-population ratio is (139.1 million/237.9 million) 100, which is 58.4 percent
2 In July 2014, in the economy of Sandy Island, 10,000 people were employed, 1,000 were unemployed, and 5,000 were not in the labor force During August
2014, 80 people lost their jobs and didn’t look for new ones, 20 people quit their jobs and retired, 150 unemployed people were hired, 50 people quit the labor force, and 40 people entered the labor force to look for work Calculate for July 2014
a The unemployment rate
The unemployment rate in July is 9.1 percent The unemployment rate is the number unemployed as a percentage of the labor force The number of
unemployed workers is 1,000 The labor force is the number employed plus the number unemployed so in July it is 11,000 The unemployment rate equals
(1,000/11,000) 100, which is 9.1 percent
b The employment-to-population ratio
The population ratio is 62.5 percent The
employment-to-population ratio is the number employed as a percentage of the working-age population The number of employed people is 10,000 The working-age population
is the sum of the labor force and the number of people who are not in the labor force, which is 16,000 The employment-to-population ratio is (10,000/16,000)
100, which is 62.5 percent
And calculate for the end of August 2014
c The number of people unemployed
The number of people who are unemployed at the end of August is 840 The number of people who are unemployed at the end of August equals the number
Trang 7unemployed in July plus the number of people who lost their job and who stayed in the labor market plus the number of people entering the labor market minus the
number of people who were hired minus the number of people who left the labor
market So the number of people unemployed equals 1,000 + 40 150 50, which
is 840
d The number of people employed
The number of people who are employed at the end of August is 10,050 The
number of people who are employed at the end of August equals the number
employed in July minus the people whom lost their jobs plus the number of people who gained jobs
e The unemployment rate
The unemployment rate at the end of August is 7.7 percent The unemployment
rate equals the number unemployed expressed as a percentage of the labor force The number of people who are unemployed is 840 The labor force equals the
number employed plus the number unemployed and at the end of August it is
10,890 The unemployment rate at the end of August equals (840/10,890) 100, which is 7.7 percent
Use the following information to work Problems 3 and 4
In October 2009, the U.S unemployment rate was 10.0 percent In October 2011,
the unemployment rate was 8.9 percent Predict what happened to:
3 Unemployment between October 2009 and October 2011, if the labor force
was constant
If the labor force is constant, the only way the unemployment rate can decrease is
if the number of unemployed workers decreases
4 The labor force between October 2009 and October 2011, if unemployment
was constant
If unemployment is constant, the only way the unemployment rate can decrease is
if the labor force increases
5 Shrinking U.S Labor Force Keeps Unemployment Rate From Rising
An exodus of discouraged workers from the job market kept the
unemployment rate from climbing above 10 percent Had the labor force not decreased by 661,000, the unemployment rate would have been 10.4
percent The number of discouraged workers rose to 929,000 last month
Source: Bloomberg, January 9, 2010 What is a discouraged worker? Explain how an increase in discouraged
workers influences the official unemployment rate and U–4
A discouraged worker is a person, who currently is not working, would like a job,
has looked for one in the recent past, but has stopped looking for work because of repeated failures in finding a job If a worker who had been looking for work quits
looking, the official unemployment rate, U-3, falls U-4 includes discouraged
workers among the ranks of the unemployed so when the worker stops looking for work and becomes a discouraged worker, the U-4 unemployment rate does not
change
Trang 8Use the following news clip to work Problems 6 and 7.
Some Firms Struggle to Hire Despite High Unemployment
Matching people with available jobs is always difficult after a recession as the economy remakes itself but the disconnect is particularly acute this time Since the recovery began in mid-2009, the number of job openings has risen more than twice
as fast as actual hires If the job market were working normally, openings would be getting filled as they appear Some five million more would be employed and the unemployment rate would be 6.8%, instead of 9.5%
Source: The Wall Street Journal, August 9, 2010
6 If the labor market is working properly, why would there be any
unemployment at all?
Unemployment will always exist in the labor market because of normal labor market frictions People newly entering the labor market, workers quitting a job to look for a better job, firms laying-off workers because consumers no longer want to buy the goods produced by the firms will always be part of the labor market All of these events create unemployment, so even when the labor market is operating at peak efficiency, unemployment will always be present
7 Are the 5 million workers who cannot find jobs because of mismatching in the labor market counted as part of the economy’s structural unemployment or part of its cyclical unemployment?
Even though these workers are unemployed during a recessionary period, their unemployment is the result of a mismatch between their skills and the skills required for the available jobs So while they might be counted as part of cyclical unemployment because they lost their jobs because of the recession, the
mismatch means that these workers might also be counted as part of the
economy’s structural unemployment
Use the following information to work Problems 8 and 9
The people on Coral Island buy only juice and cloth The CPI basket contains the quantities bought in 2013 The average household spent $60 on juice and $30 on cloth in 2013 when the price of juice was $2 a bottle and the price of cloth was $5
a yard In 2014, juice is $4 a bottle and cloth is $6 a yard
8 Calculate the CPI basket and the percentage of the household’s budget spent
on juice in 2013
The CPI basket is 30 bottles of juice and 6 yards of cloth The total amount spent
on the CPI basket in 2012 was $90 and of that $60 was spent on juice The
percentage of the household’s budget spent on juice was ($60/$90) × 100, which
is 66.7 percent
9 Calculate the CPI and the inflation rate in 2014
The CPI in 2014 is 173.3 To calculate the CPI, divide the value of the CPI basket in
2014 prices by the base-year value of the CPI basket and then multiply the
resulting number by100 The value of the CPI basket in 2014 prices is: ($4 30) + ($6 6) = $156 The value in base-year prices is $60 + $30 (provided in the
question), which equals $90 So the CPI is ($156/$90) 100 = 173.3
The inflation rate in the 2014 is 73.3 percent The inflation rate equals the CPI in
2014 year minus the CPI in the base year expressed as a percentage of the base-year CPI Because the base-base-year CPI is 100, the inflation rate is [(173.3 – 100)/ 100] × 100 = 73.3 percent
Trang 9Use the following data to work Problems 10 to 11.
The BLS reported the following CPI data:
June 2008 217.3
June 2009 214.6
June 2010 216.9
10 Calculate the inflation rates for the years ended June 2009 and June 2010
How did the inflation rate change in 2010?
The inflation rate for the year ended June 2009 is −1.2 percent; the inflation rate
for the year ended June 2010 is 1.1 percent
The inflation rate is the percentage change in the price level It is equal to [(Pthis year
– Plast year)/ Plast year] 100 For the year ended in June 2009 the inflation rate is
[(214.6 – 217.3)/217.3] 100, which is −1.2 percent For the year ended in June
2010 the inflation rate is [(216.9 – 214.6)/214.6] 100, which is 1.1 percent The
inflation rate increased in 2010
11 Why might these CPI numbers be biased? How can alternative price indexes
avoid this bias?
The CPI numbers might be biased because of the new goods bias, the quality
change bias, the commodity substitution bias, and the outlet substitution bias The new goods bias is that new goods are often more expensive than the older goods
that they replace The quality change bias is that increases in the quality of a good are often accompanied by increases in the good’s price The commodity
substitution bias reflects the point that consumers will buy less of a good whose
price increased and more of a good whose price has not changed Finally the outlet substitution bias points out that when prices rise, consumers shop more frequently
at stores with cheaper prices
Each of the alternative price indexes attempts to overcome some of the bias in the
CPI numbers The chained CPI uses prices and quantities from the previous period
and the current period The chaining process overcomes the commodity
substitution process And because it contains current period quantities, it also does not suffer from the new goods bias The personal consumption expenditure
deflator contains goods and services omitted from the CPI It is calculated from the nominal and real consumption expenditure data and so it, too, is computed using a chaining procedure Because the personal consumption expenditure deflator is
calculated using a chaining procedure, it does not suffer from the commodity
substitution bias or the new goods bias The GDP deflator is calculated from
nominal and real GDP data It is broader than the personal consumption
expenditure deflator because it contains goods and services in consumption
expenditure, investment, government expenditure, and net exports The GDP
deflator is calculated using a chaining procedure and so it also avoids the
commodity substitution bias and new goods bias
Trang 10Answers to Additional Problems and Applications
12 What is the unemployment rate supposed to measure and why is it an
imperfect measure?
Ideally the unemployment rate would measure the underutilization of labor
resources But it is an imperfect measure for two reasons First the unemployment rate does not include some underutilized labor In particular the unemployment rate completely omits marginally attached workers, such as discouraged workers These workers are not included in the unemployment rate Second the unemployment rate counts as fully employed workers who are working part time but who want full-time jobs These workers are underutilized because they would like to work for more hours than is presently the case
13 According to FRED, in the fourth quarter of 2014, the labor force was
2,394,000, employment equaled 2,254,500, and working-age population was 2,984,600 in New Zealand
Calculate the
a Labor force participation rate
The labor force participation rate equals the labor force divided by the working-age population then multiplied by 100 Using this formula with the data given in the problem shows that the labor force participation rate equals
(2,394,000/2,984,600) × 100 = 80.21 percent
b Employment-to-population ratio
The employment-to-population ratio equals employment divided by the working-age population then multiplied by 100 Using this formula with the data given in the problem shows that the employment-to-population ratio equals
(2,254,500/2,984,600) × 100 = 75.53 percent
c Unemployment rate
The unemployment rate equals the number of people unemployed (labor force - employment) divided by the labor force, then multiplied by 100 Using this formula shows that the unemployment rate equals [(2,394,000 - 2,254,500)/2,394,000] ×
100 = 5.8 percent
14 Jobs Report: Hiring Up, Unemployment Down
The Labor Department reported that hiring accelerated in November, and the unemployment rate fell to 8.6 percent from 9 percent in October Two reasons for the fall are that more Americans got jobs, but even more people gave up
on their job searches altogether
Source: CNNMoney, December 2, 2011
a If the only change was that all the newly hired people had been unemployed
in October, explain how the labor force and unemployment would have changed
The labor force would not have changed The number of people unemployed would have decreased so the unemployment rate would have fallen
b If the only change was that people gave up on their job searches, explain how the labor force and unemployment would have changed
The number of people unemployed would have fallen, so the labor force and the unemployment rate would have decreased