Current information relating to employment status in a small economy is presented in Table 1. Assume...

Current information relating to employment status in a small economy is presented in Table 1. Assume that the economy follows the same methodology as the Australian Bureau of Statistics for collecting and reporting on labour statistics.

Table 2. Employment status of the population

Employed	11.486 million
Unemployed	0.609 million
Working-age population	18.557 million
Total population	23.225 million
Not in the labour force	6.462 million

Calculate the unemployment rate. (Show your workings.)
Calculate the participation rate. (Show your workings.)Identify each of the following individuals as employed, unemployed or not in the labour force and explain why.
The way the unemployment rate is calculated is criticised for both underestimating and overestimating the level of unemployment. Explain how this can be the case.

Solutions

Expert Solution

a) The unemployment rate is calculated by dividing total number of unemployed persons by working age population.
Unemployment Rate = Total no. of unemployed / Working age population

( 0.609 / 18.557 ) * 100 = 3.282%

b) The participation rate is calculated by dividing number people who are active in labor force by the working age population.

Participation Rate = ( Employed + Unemployed ) / Working Age Population
( 11.486 + 0.609 ) / 18.557 = 0.6518
Participation Rate = 65.18%

c) The unemployment rate actually indicates the status of the economy as a higher number of unemployment means there could be a recessionary situation in the economy. However, the unemployment number itself prone to miscalculation depending upon the data. In reality, it could be either underestimated or overestimated because of the way it has been carried out. The labor market, by its nature is highly fragmented and because of that sometimes many people with ability and skills could not get job. Such people either becomes discouraged workers or part-time workers. Discouraged workers can not be included in unemployed category because by definition they are not seeking job. Similarly, part time workers are not included in employed people because they are working full time or at least 40 hours per week.
Such instances affects the reporting of the data and that may either underestimate or overestimate the unemployment numbers.

Rahul Sunny answered 1 year ago

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