Question

Assume that the employment data for Lalaland are as follows:

• Population aged 16 and above 243,190

• Army 1,705

• Labour force 161,600

• Unemployed 7,757

a) Calculate:

i. the number of people (16 years old and over) not in the labour force.

ii. the number of people employed.

iii. the unemployment rates.

iv. the unemployment rate if army were counted in the labour force.

b) Categorize each of the individuals below as either frictionally, structurally, or cyclically unemployed.

i. Kamal is an auto worker from BMW who has been laid off because of the recent sharp decline in GDP, which has resulted in a severe decrease in auto sales.

ii. Danial was no longer fit to work in the coal mines because of new automated

mining techniques. Arif, an aerospace engineer, was unemployed because of large decrease in defence spending. Since the space program is also on a tight budget, Arif has not been able to get alternative jobs for the past two months.

iv. Latoya quits her job as a salesperson out of frustration stemming from her lack of promotion. She begins to look for a management position in a similar work setting.

c) Lalaland also have the following consumer price index (CPI). Complete the table with inflation rate values from the year 2015 to the year 2020.

d) With the aid of a diagram, explain the short-run and long-run relationship between inflation and unemployment.

Answer 1

Labour force comprises of unemloyed and employed. Unemployment refers to employable individuals who are not employed currently, but are activey looking for jobs. Conusmer price index or CPI is the measure of average change in prices that consumers pay for a basket of goods and services over a given time period.

 

a)

i)

The number of people that are not in the labour force will be the number of people in the labour force subtracted from the total population. Thus, 

 

ii)

Labour force is the sum of unemployed and employed individuals. Thus, employed individuals will be 

 

iii)

The unemployment rate is the number of unemployed individuals divided by the total labour force, therefore, 

 

iv)

If the army were included in the labour force, then total labour force would be:

 

Then , unemployment rate will be 

 

b)

i)

Kamal will fall under cyclical unemployment. Cyclical unemployment is the result of economic upturns and downturns. Here, due to the decline in GDP which is an economic downturn, Kamal was laid off.

 

ii)

Danial will fall under structural unemployment which is a result of the differences between skills of the workers and the jobs that are available in the market. Due to new technology in mining, Danial did not possessed the skills to continue his work.

 

iii)

Arif will fall under cycical unemployment as due to decrease in defence spending, there is an economic downturn due to which he lost is job.

 

iv)

Latoya will fall under frictional unemployment as she left the job voluntarily to seek jobs that has better opportunities.

 

c)

Inflation rate is calculated by taking the difference of price index between the said year and the base year and dividing by the base year. The result is then multiplied by hundred. The values of inflation rates are given below.

 

d)

The relationship between inflation and unemployment is shown by the Phillips curve. In the short run, there is an inverse relationship between inflation and unemployment , so the curve is downward sloping. In the long run, the Phillips curve becomes vertical as there is no trade of between unemployment and inflation.

 

The short run Phillips curve is shown below. The inflation rate is meaured on the y-axis and the unemployment rate is measured on the x-axis. As inflation decreases, unemployment increases. Increase in aggregate demand causes increase in output and more workers are hired. This decreases unemployment and price level increases leading to an increase in inflation. Thus, there exists a trade of between unemployment and inflation.

 

In the log run , however, unemployment and inflation have no relationship and the Phillips curve becomes vertical operating at the natural rate of unemployment. The long run Phillips curve is shown below.