Question

Suppose that you collect the following data from the imaginary country of Econoland. There is a total population of 10,000. 3,000 are children under the age of 16, 1,000 people in the military, and no people in prison due to a recent reform of the criminal justice system. Of the remaining 6,000 people, 3,000 currently have a job, 1,000 are actively looking for a job, 1,000 would like a job but have given up looking, and 1,000 are retired and have no interest in working.

• a.) What is the unemployment rate in Econoland? 

• b.) What is the labor force participation rate in Econoland? 

• c.) Suppose that, due to a sudden economic downturn, 500 people are laid off. If these 500 people 
immediately start looking for new work, what will the unemployment rate be in Econoland? 

• d.) Suppose instead that the 500 people who are laid off are union members. Instead of immediately 
looking for new jobs, these workers collect a benefit from their union and wait for the union to arrange for their firm to hire them back when economic conditions improve. What will the unemployment rate be in Econoland in this case? 

• e.) Given your answers in c.) and d.), do unions always lead to higher unemployment rates? Is this good or bad? 


Answer 1

Ans:

a) Unemployment rate = unemployed / labor force

Labor force = employed + unemployed

                   = 3000 + 1000

                   = 4000

Unemployment rate = 1000 / 4000

                                 = 0.25 or 25%

b) Labor force participation rate = labor force / working age non-institutionalized population

    Labor force participation rate = 4000 / 6000

                                                   = 66.67%

c)

Labor force = 2500 + 1500

                    = 4000

Unemployment rate = 1500 / 4000

                                = 0.375 or 37.5%

d)

Labor force = 2500 + 1000

                    = 3500

Unemployment rate = 1000 / 3500

                                 = 28.57%

e) good

It is good that unions does not lead to higher unemployment rates.