Question

ECO - 252 - Macroeconomics

1. In each of the following cases, Ceteris Paribus, specify what happens to the unemployment rate (increases, decreases, or remains the same) and to the labor force participation rate (increases, decreases, or remains the same).

a. Anna loses her job but does not look for another one because she decides to go back to school.

b. Matt quits his current job to start a new job immediately.

c. Linda has just graduated with a Bachelor's Degree. She is looking for her first job but has not found one

yet.

d. John lost his job because of a recession. He immediately starts to look for another one.

e. Tara was fired 5 months ago. She looked for a job but could find any so she gave up looking for one.

f. Ted is 18 years old and he just started his very first job.

Answer 1

Labor force participation rate = Labor force / Working-age population

Unemployment rate = Number of unemployed / Labor force

(a) Amy has left labor force, therefore labor force decreases:

Labor force participation rate - Decrease

Unemployment rate - Increase

(b) Matt has left job but got another immediately, so he is not unemployed.

Labor force participation rate - Remain the same

Unemployment rate - Remain the same

(c) Linda has joined labor force and is frictionally unemployed.

Labor force participation rate - Increase

Unemployment rate - Increase

(d) John is in labor force and is cyclically unemployed.

Labor force participation rate - Remain the same

Unemployment rate - Increase

(e) Tara is a discouraged worker and not in labor force.

Labor force participation rate - Decrease

Unemployment rate - Increase

(f) Ted has joined labor force and is employed.

Labor force participation rate - Increase

Unemployment rate - Decrease