Question

Consider an economy that initially has a labor force of 2000 workers. Of these workers, 1900 are employed and each works 40 hours per week. 10 units of output are produced by each hour of labor. There are another 1500 adults in the economy who are not in the labor force.

A) What is the labor force participation rate?

The economy then enters a recession. Employment falls by 4%, and the number of hours per week worked by each employed worker falls by 2.5%. In addition, 0.2% of the labor force becomes discouraged at the prospect of finding a job and leaves the labor force.

B) After all of these changes, what is the new size of the labor force?

C) How many workers are unemployed now?

D) What is the new unemployment rate?

Answer 1

A) The formula to calculate the labor force participation rat is given by,

LFPR = Labor Force / Total Population

Total Population = 2000 + 1500 = 3500

LFPR = 2000 / 3500 = 0.57

The LFPR is 57%.

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B) After reccession, employment falls by 4%.

So, number of employed persons will be,

1900*0.04= 76.

Number of employed persons = 1900 - 76 = 1824

Labor force also reduces by 0.2%.

The size of new labor force will be,

2000 * 0.002 = 4

New labor force = 2000 - 4 = 1996.

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C) Total number of unemployed workers are = 1996 - 1824 = 172.

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D) The formula for calculating the unemployment rate is given by,

U.R = Number of Unemployed People / Labor Force

U.R = 172 / 1996 = 0.086.

Thus, the new unemployment rate is 8.6%.