Question

How can changes in the number of people in the labor force and its components cause changes in the unemployment rate?

If an economic crisis leads to a large number of discouraged workers in an economy, how does it affect the ability of the official labor market statistics such as unemployment rate to provide healthy information about the nature of the labor market in the economy?

Answer 1

solution:

1) There are several factors that can impact the unemployment rate due to changes in the labor force. Some of the key factors are -

*. If the number of individuals on active armed forces duty increase, the labor force declines and the unemployment rate also declines even with no new jobs being created.

*. When there is an increase in ageing population, the number of individuals moving out of the labor force increases and this reduces the unemployment rate.

*. When there is a long recession and individuals stop looking for a job, they are not counted in the labor force and the unemployment rate declines.

2) When the economy is in recession, the headline unemployment rate provides a key indication of economic health and improvement in economic health. However, the headline unemployment rate can be deceptive.

When there is a deep recession, there are bound to be discouraged workers who stop looking for a job. They are no longer counted in the labor force. Since the labor force declines, the unemployment rate automatically declines. But this does not indicate improvement in economic conditions.

To counter this problem the United States has the U6 rate measurement. The U6 rate includes the unemployed, marginally attached (includes discouraged workers) and part-time workers (for economic reasons). Just as an example, during November 2009, the headline unemployment rate in the United States was 9.9%. However, the U6 rate during the same month was 17.1%.