Question

1. Use the following information to answer parts a and b. Be sure to provide a thorough explanation, including a definition of any terms used.
   • Country Alpha has an unemployment rate of 6.1% while Country Beta has an unemployment rate of 7.3%.

1. If both countries are experiencing normal economic times what is the reason(s) for the difference in the unemployment rates?
2. Both countries are not experiencing normal economic times. Each country has a natural rate of unemployment of 5%. What is the reason(s) for the high rates of unemployment?

Answer 1

Ans.

a) If both countries are experiencing normal economic times the reason(s) for the difference in the unemployment rates between 2 countries will be as follows :

- Unemployment rate refers to the ratio of unemployed to labor force

- Labor force refers to he number of people who either have a job or are actively looking for a job. This number excludes retirees, children, stay- at- home parents, full- time students, and other categories of people who are neither employed nor actively seeking employment.

- Unemployed refers to people who are actively seeking employment but are currently without a job. Some special subcategories include:

o Long- term unemployed - People who have been out of work for a long time (more than three to four months in many countries) but are still looking for a job.

o Frictionally unemployed - People who are not working at the time of filling out the statistical survey because they are taking time to search for a job that matches their skills, interests, and other preferences better than what is currently available, or people who have left one job and are about to start another job.

- The key reasons for the difference in the 2 countries can be because the frictionally unemployed includes people who have voluntarily left their previous positions in order to change their jobs, in other words, they are “between jobs,” and those new entrants or re- entrants into the labor force who have not yet found work. Frictional unemployment is short- term and transitory in nature.

b)

If both countries are not experiencing normal economic times. Each country has a natural rate of unemployment of 5%. The reason(s) for the high rates of unemployment will be as follows :

A typical cause of business cycle downturns is a tight labor market—that is, one with low unemployment. An overheated economy leads to inflation when unemployment is very low. Workers ask for higher wages because they expect prices of goods and services to keep going up, and at the same time they have market power against employers because there are few available workers to be hired. This upward pressure on wages coupled with the impact of wage escalator clauses (automatic increases in wages as the consumer price index grows) triggers a price–wage inflationary spiral.

A key aspect in this process is inflation expectations. Because inflation expectations are high, the request for higher wages is stronger, which induces employers to increase prices in advance to keep their profit margins stable. This avalanche process grows with time. These actions may trigger a deep recession and higher unemployment.