* * This is Chapter 22 in Economics.
A 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 112 (page 520 in Economics)
1. What determines if a person is in the labor force?
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
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
4. 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
5
MONITORING JOBS
AND INFLATION**
C h a p t e r
5. Describe the alternative measures of unemployment.
The Bureau of Labor Statistics keeps track of 6 alternative measures of unemployment:
• U-1 measures long-term unemployment. It counts as unemployed only workers who have been
unemployed for 15 or more weeks.
Page 115 (page 523 in Economics)
1. Why does unemployment arise and what makes some unemployment unavoidable?
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
3. What is the natural unemployment rate?
4. How does the natural unemployment rate change and what factors might make it change?
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
6. What is the output gap? How does it change when the economy goes into recession?
7. How does the unemployment rate fluctuate over the business cycle?
Page 121 (page 529 in Economics)
1. What is the price level?
2. What is the CPI and how is it calculated?
3. How do we calculate the inflation rate and what is its relationship with the CPI?
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
5. What problems arise from the CPI bias?
6. What are the alternative measures of the price level and how do they address the problem of bias
in the CPI?
68 C H A P T E R 5
A n s w e r s t o t h e S t u d y P l a n Pr o b l e m s a n d A p p l i c a t i o ns
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
b. Labor force participation rate.
The labor force participation rate is 64.6 percent. The labor force participation rate is the percentage
c. Employment-to-population ratio.
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
(1,000/11,000) 100, which is 9.1 percent.
b. The employment–to-population ratio.
The employment-to-population ratio is 62.5 percent. The employment–to-population ratio is the
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
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.
M O N I T O R I N G J O B S A N D I N F L A T I O N 69
e. The unemployment rate.
The unemployment rate at the end of August is 7.7 percent. The unemployment rate equals the
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.
4. The labor force between October 2009 and October 2011, if unemployment was constant.
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
for work and becomes a discouraged worker, the U-4 unemployment rate does not change.
Use 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?
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
70 C H A P T E R 5
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.
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
Use 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.
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
M O N I T O R I N G J O B S A N D I N F L A T I O N 71
Answers to Additional Problems and Applications
12. What is the unemployment rate supposed to measure and why is it an imperfect measure?
13. The BLS reported the following data for July 2012:
Labor force participation rate: 63.7 percent
Calculate the
a. Labor force.
The labor force participation rate equals the labor force divided by the working-age population then
multiplied by 100. Rearranging this formula shows that the labor force equals the working-age
b. Employment.
The employment-to-population ratio equals employment divided by the working-age population then
multiplied by 100. Rearranging this formula shows that employment equals the working-age population
c. Unemployment rate.
The unemployment rate equals the number of people unemployed divided by the labor force. The labor
force, from part (a), is 155.0 million. The labor force equals the number of people employed plus the
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.
b. If the only change was that people gave up on their job searches, explain how the labor force
and unemployment would have changed.
15. The BLS reported that in July 2012, employment decreased by 195,000 to 142,220,000 and the
unemployment rate increased from 8.2 percent to 8.3 percent. About 3.4 million people were
marginally attached workers and 0.9 million of them were discouraged.
a. Calculate the change in unemployment in July 2012.
At the start of July employment was 142,220,000 + 195,000 = 142,415,000. The unemployment rate,
b. With 3.4 million marginally attached workers and 0.9 million of them discouraged workers, what
are the characteristics of the other 2.5 million marginally attached workers?
16. A high unemployment rate tells us that a large percentage of the labor force is unemployed but
not why the unemployment rate is high. What unemployment measure tells us if (i) people are
searching longer than usual to find a job, (ii) more people are economic part-time workers, or (iii)
more unemployed people are job losers?
U-1 measures long-term unemployment of 15 weeks or more. If U-1 exceeds its normal value, then
people are taking longer than usual to find a job. U-6 equals U-5 plus part-time workers who want full–
17. Some Firms Struggle to Hire Despite High Unemployment
With about 15 million Americans looking for work, some employers are swamped with job
applicants, but many employers can’t hire enough workers. The U.S. jobs market has changed.
During the recession, millions of middle-skill, middle-wage jobs disappeared. Now with the
recovery, these people can’t find the skilled jobs that they seek and have a hard time adjusting to
lower-skilled work with less pay.
Source: The Wall Street Journal, August 9, 2010
If the government extends the period over which it pays unemployment benefits to 99 weeks,
how will the cost of being unemployed change?
18. Why might the unemployment rate underestimate the underutilization of labor resources?
The official unemployment rate underestimates the underutilization of labor resources for two reasons.
First the official unemployment rate completely omits some underutilized labor. In particular the official
M O N I T O R I N G J O B S A N D I N F L A T I O N 73
Use the following data to work Problems 19 to 21.
The IMF World Economic Outlook reports the
unemployment rates in the table.
19. What do these numbers tell you about the phase
of the business cycle in the three regions in 2011?
The unemployment rates fell in the United States
20. What do these numbers tell us about the relative size of their natural unemployment rates?
21. Do these numbers tell us anything about the relative size of the labor force participation rates and
employment-to–population ratios?
22. A Half-Year of Job Losses
For the first six months of 2008, the U.S. economy lost 438,000 jobs. The job losses in June were
concentrated in manufacturing and construction, two sectors that have been badly battered in the
recession.
Source: CNN, July 3, 2008
a. Based on the news clip, what might be the main source of increased unemployment?
The main source of increased unemployment likely is in the form of job losses in manufacturing and
b. Based on the news clip, what might be the main type of increased unemployment?
23. Governor Plans to Boost Economy with Ecofriendly Jobs
Oregon’s 5.6 percent unemployment rate hovers close to the national average of 5.5 percent. A
few years ago, Oregon had one of the highest unemployment rates in the nation. To avoid rising
Source: The Oregonian, July 8, 2008
a. What is the main type of unemployment that Governor Kulongoski is using policies to avoid?
Explain.
Governor Kulongoski is attempting to decrease both frictional and some structural unemployment. The
educational policies of attempting to train students for jobs with growing demand is an attempt to
2010
2011
9.6
9.0
10.1
10.9
5.1
4.5
74 C H A P T E R 5
b. How might these policies impact Oregon’s natural unemployment rate? Explain.
24. A typical family on Sandy Island consumes only juice and cloth. Last year, which was the base year,
the family spent $40 on juice and $25 on cloth. In the base year, juice was $4 a bottle and cloth
was $5 a length. This year, juice is $4 a bottle and cloth is $6 a length. Calculate
a. The CPI basket.
The CPI basket is 10 bottles of juice and 5 lengths of cloth.
b. The CPI in the current year.
The CPI in the current year is 107.7. To calculate the CPI, divide the value of the CPI basket in current
c. The inflation rate in the current year.
25. Amazon.com agreed to pay its workers $20 an hour in 1999 and $22 an hour in 2001. The price
level for these years was 166 in 1999 and 180 in 2001. Calculate the real wage rate in each year.
Did these workers really get a pay raise between 1999 and 2001?
26. News release
In May 2012, real personal consumption expenditure (PCE) was $9,588 billion and the PCE
deflator was 115.4. In June 2012, real personal consumption expenditure was $9,576 billion and
personal consumption expenditure was $11,062 billion.
Source: BEA, July 30, 2012
Calculate personal consumption expenditure in May 2012 and the PCE deflator in June 2012. Was
the percentage increase in real personal consumption expenditure greater or smaller than that in
personal consumption expenditure?
Personal consumption expenditure = (real personal consumption expenditure) × (PCE deflator) ÷ 100,
so in May 2012 personal consumption expenditure equaled $9,588 billion × 115.4 ÷ 100 = $11,064
billion.
PCE deflator = ([personal consumption expenditure] ÷ [real personal consumption expenditure) × 100,
so in June 2012 the PCE deflator = ($11,062 billion ÷ $9,576 billion) × 100 = 115.5.
27. Hardworking Americans Should Not Be Living in Poverty
The federal minimum wage has remained frozen for the past three years at $7.25 an hour, while
the prices of gas and milk have risen steadily. Over this three-year period, the real value of the
minimum wage has fallen to $6.77 per hour.
Source: CNN, July 25, 2012
By what percentage did the CPI increase over these three years?
28. After you have studied Economics in the News on pp. 122–123 (530–531 in Economics), answer the
following questions.
a. How many jobs must be created each month to keep pace with a growing population?
b. What normally happens to the unemployment rate when the pace of job creation exceeds the
increase in population?
c. Why might the unemployment rate sometimes increase, when the pace of job creation exceeds
d. How would you expect the labor force participation rate to respond to job creation in excess
of population growth?
e. How would you expect an increase in the growth rate of real GDP (see last paragraph of news
article) to affect jobs and unemployment?
29. Out of a Job and Out of Luck at 54
Too young to retire, too old to get a new job. That’s how many older workers feel after getting
the pink slip and spending time on the unemployment line. Many lack the skills to craft resumes
and search online, experts say. Older workers took an average of 21.1 weeks to land a new job in
2007, about 5 weeks longer than younger people. “Older workers will be more adversely affected
because of the time it takes to transition into another job,” said Deborah Russell, AARP’s
director of workforce issues.
Source: CNN, May 21, 2008
a. What type of unemployment might older workers be more prone to experience?
Older workers are more likely to experience structural unemployment.
b. Explain how the unemployment rate of older workers is influenced by the business cycle.
Older workers might be more likely to be fired when the economy enters a recession because the
76 C H A P T E R 5
c. Why might older unemployed workers become marginally attached or discouraged workers
during a recession?