Key Concepts

Discussion and Review Questions

Learning Objective 23.1 Understand what unemployment is and how it’s measured.

  1. Think of three people from your own life (or even from popular TV shows and films) who are or were unemployed, employed, and not in the labor force. What events and choices led to their employment situation?

  2. Describe three economic or social changes that have contributed to the trends in labor force participation rates for men and women since the 1950s. How have these changes impacted the trade-offs people face between home production and the labor market?

Learning Objective 23.2 Learn how people move in and out of jobs and in and out of the labor market.

  1. From the perspective of workers and employers, discuss the benefits and the costs of a dynamic labor market.

  2. Explain why it is possible to find many job openings online in shrinking industries such as newspaper publishing or brick-and-mortar retail.

  3. Should the official unemployment rate include people who have searched for work in the last year but are not currently searching? Would such a measure be better or worse than the official measure of the unemployment rate?

Learning Objective 23.3 Analyze the causes of unemployment.

  1. What is the equilibrium unemployment rate and why isn’t it equal to zero? Explain.

  2. Why would a company want to pay its workers more than the prevailing market wage? What is the impact on employers, workers, and the overall labor market?

Learning Objective 23.4 Learn about the economic and social costs of unemployment.

  1. Jaivan has two children and is an auto worker who became unemployed, along with most of his coworkers, when the plant that he worked at closed. Describe and discuss the economic costs of unemployment to Jaivan, to his family, and to his community.

  2. Your friend talks to you about how the company she works for is having a terrible year. She’s terrified of getting laid off and the impact it would have on her family. What advice would you give her to prepare for the possibility of unemployment?

Study Problems

Learning Objective 23.1 Understand what unemployment is and how it’s measured.

  1. Sarah, Alicia, and Philip all lost their jobs when the technology start-up they worked for was acquired by another company. After a few weeks of searching for another full-time job, Sarah decided to go back to school to get an LPN certification. In order to finish as fast as possible, Sarah chose not to work while finishing the certification. Alicia took a part-time job in retail shortly after losing her job, but she continues to search diligently for full-time work. Philip searched for a job for the first five weeks after being laid off, but as bills began piling up, he found himself moving into his parents’ basement. He recently gave up looking for work because he figures that there just aren’t jobs available right now so there is no point looking. Are Sarah, Alicia, and Philip unemployed, employed, or not in the labor force? Would any of the three be considered a discouraged worker? How would each contribute to the unemployment rate?

  2. Using the following data from the U.S. Bureau of Labor Statistics, calculate the size of the labor force, unemployment rate, and labor force participation rate for 2009 and 2018.

    Type of worker Number of individuals in 2009 Number of individuals in 2018
    Working-age population 236 million    258 million   
    Unemployed 14.3 million    6.3 million   
    Employed 140 million   156 million   

Learning Objective 23.2 Learn how people move in and out of jobs and in and out of the labor market.

  1. Determine the labor market status of each of the following people. If they are unemployed, can they be considered long-term unemployed?

    1. Demetrius is a voice-over actor. He has a gig this week, but next week he’ll have to start auditioning for new roles.

    2. Alejandra is laid off and has to take a part-time retail job because she can’t find a full-time job. She is spending her extra time learning how to code.

    3. Kathryn quit her job when it was relocated too far away from her family. She has been looking for work for eight months, but so far hasn’t been called in for an interview.

  2. Use the table below from the U.S. Bureau of Labor Statistics to answer the following questions.

    Category May 2019
    Civilian labor force 162.9 million    
    Employed 157 million    
    Unemployed 5.9 million    
    Not in labor force 96 million    
    Marginally attached to the labor force 0.6 million    
    Involuntarily part-time 4.4 million    

    1. What was the unemployment rate in May 2019?

    2. If we were to count marginally attached workers as unemployed, what would the unemployment rate have been in May 2019?

    3. If we were to count all of those who are working part-time involuntarily as unemployed, what would the unemployment rate have been in May 2019?

    4. If you repeated this calculation for all time periods for the United States and graphed the data, do you think the changes in the unemployment rates would all look similar or different? Why?

  3. Consider the following scenarios and explain for each what the effect is on the official unemployment rate.

    1. Unemployed people become discouraged and stop searching for work.

    2. Previously unemployed people find part-time jobs, even though they need full-time work.

    3. Formerly discouraged workers find work.

    4. People who were previously discouraged workers begin looking for work again.

Learning Objective 23.3 Analyze the causes of unemployment.

  1. Classify the following scenarios as examples of frictional, structural, or cyclical unemployment, and explain your answer.

    1. Amanda just finished a computer science degree and wants to live in San Francisco. There are lots of openings for people with her skills, but she wants to be sure to find a job that’s a good fit for her. She moves to San Francisco without a job and crashes on a friend’s couch while she interviews for jobs.

    2. A food-processing factory decides to increase its wages by 50% above what their competitors are paying. They find that fewer workers quit or call in sick, and that they have lower spoilage rates as a result of the more consistent, productive workforce. Their competitors respond by raising wages as well. The quantity of labor supplied to the industry increases to try to take advantage of the higher wages and is higher than the quantity demanded by employers at the new wage.

    3. Li Wei owns a homebuilding company. During a severe downturn in the housing market, he has to fire many of his subcontractors.

    4. Which of the three types of unemployment (frictional, structural, or cyclical) will persist even if the wage is at the equilibrium wage? Explain your answer.

  2. Consider whether each of the following would increase or decrease frictional unemployment.

    1. LinkedIn improves its algorithms, enabling it to more efficiently connect employers with workers who have the experience and skills they need.

    2. Rapid innovation in the tech sector means that tech companies are constantly changing the skills they require to develop, manage, and service new products.

    3. Unemployment insurance programs become less generous.

  3. Jane is the general manager at a new café and wants to hire a few baristas. The going rate for baristas in the area is $9.55 per hour. Jane has heard that many of the local coffee shops have high turnover with baristas “ghosting” them—simply not showing up for their shift and never coming back. Jane starts to put together an advertisement to hire baristas for $9.55 per hour, but changes her mind and lists the wage she’ll pay at $11 per hour. Why would Jane pay $9.55 per hour? What’s the rationale for paying $11 (or any wage higher than $9.55)?

  4. Suppose the graph depicts the labor market for retail associates in Nashville.

    A graph plots Thousands of workers along the horizontal axis and Wage per hour in dollars along the vertical axis.

    1. What is the equilibrium wage for retail associates? How many associates are employed at the equilibrium wage and what is the unemployment rate?

    2. The Tennessee state government enacts a minimum wage of $9 per hour. How many associates are employed at $9 per hour? Is there any unemployment?

    3. Workers successfully lobby the state legislature, and the minimum wage is raised to $11 per hour. How many associates are employed at $11 per hour? Is there any unemployment? If so, are these workers frictionally, structurally, or cyclically unemployed?

Learning Objective 23.4 Learn about the economic and social costs of unemployment.

  1. An economic downturn throws millions of people out of work. In some industries, workers who remain employed, or “insiders,” continue to develop their skills, enabling them to push wages above the level at which less-skilled “outsiders” could be employed. What do you expect to happen to the equilibrium unemployment rate due to hysteresis? Explain your reasoning.