Question

d) Explain what ‘seasonally adjusted’ means, and why we might want to look at seasonally adjusted data instead of data that is not seasonally adjusted. [3 marks] e) Explain the difference between structural unemployment and cyclical (or demanddeficient) unemployment, and how you interpret the current unemployment rate with respect to how much is due to each of these two types. [5 marks] f) Should the target for the unemployment rate be 0%? Why or why not? [5 marks]

Answer 1

(D) Seasonally Adjusted implies analyzing economic data with the purpose of removing fluctuations that take place as a result of seasonal factors. For example, sales of air conditioners are at their peak during summers and quite less during winters. Thus, to study the general trend of sales of air conditioners, the data needs to be seasonally adjusted. These are the Observations over time (time series data) modified to eliminate the effect of seasonal variations.

Seasonally adjusted data is used as a baseline for the creation or revision of economic policy and high-level economic research. Some seasonal effects are so large they hide other price data characteristics that provide a more accurate analysis of changes in consumer buying habits. As such, the adjustment of information for seasonal effects is done in an effort to enhance the presentation and ultimate use of data for the long-term benefits

(E) STRUCTURAL UNEMPLOYMENT AND CYCLICAL UNEMPLOYMENT:

Structural unemployment is a result of decline in an industry (e.g. coal or steel) usually affecting old industries with labor intensive production methods as the newer technology that can replace the labor becomes available. This type of unemployment affects usually certain parts of a country where a declining industry is concentrated.

Cyclical unemployment is the result of a general depression in the economy resulting from the trade cycle. It deals with an economy's business cycle. Cyclical unemployment occurs when there are job losses during downturns and contractions in the business cycle. It doesn't take an actual recession, which is when an economy has negative growth for two or more quarters in a row, to cause this type of unemployment.

The unemployment rate provides insights into the economy’s spare capacity and unused resources. Unemployment tends to be cyclical and decreases when the economy expands as company’s contract more workers to meet growing demand. Unemployment usually increases as economic activity slows. Structural unemployment is a mismatch between workers’ skills or locations and job requirements.

(F) No, the target for unemployment rate should never be zero percent because it creates inflationary pressure. Zero unemployment is a terrible thing. If you want to grow an economy, you need to have resources you can hire. If everyone has a job, who do you hire? Additionally, zero unemployment will push up labor costs because the workers have all of the leverage as they can't be replaced. Keep in mind that full employment is not zero unemployment