Question

Consider an island nation located near the Bay of Bengal where the natural rate of unemployment is 7%. In 2012, the total population was 18 million with an adult population of 15 million. The major industries are agriculture, textile, and information technology, and although workers prefer full-time jobs, all industries have some combination of full-time and part-time jobs. Each full-time worker produces an average of $40,000 worth of output per year, while each part-time worker produces an average of $22,000 worth of output per year. In 2012, 1 million adults were unemployed while 9 million adults were employed, of which 1 million were underemployed. Over the following three years, beginning with 2013, the government implemented a set of policies that encouraged domestic and foreign direct investment in the major industries and started changes in the nation’s infrastructure, population and productivity. In 2015, the national census bureau determined that 200,000 of the people who were looking for work since 2012, got discouraged at some point and stopped looking for jobs. In addition, among those who were employed in 2012, 100,000 lost their full-time jobs and are still looking for employment, while 100,000 adults were forced to retire from their full-time position and are now working in part-time jobs. In 2015, the national census bureau also determined that the total population increased by 8%. During the 3-year period, the birth rate, the number of children entering the adult population, and the mortality rate, were such that the net change to the population resulted solely from legal migration. Among the migrants, 1.2 million adults entered the labor force and of these, 200,000 adults are still looking for work. Furthermore, among the employed migrants, 700,000 are underemployed.

What are the U – 3 and U – 6 unemployment rates in 2015?

Answer 1

Given that,

In 2012:

Total adult population = 15,000,000

Unemployed = 1,000,000 (Note that the underemployed/part-timers are not considered as unemployed. Instead they are considered as employed)

Underemployed = 1,000,000

Employed = 9,000,000 (Includes Full-time and Part-time Employed)

Therefore, Labor force = Employed + Unemployed = 9,000,000+1,000,000 = 10,000,000

Changes from 2012 to 2015:

Discouraged workers = 200,000 (These people are out of the labor force)

Number of people who shifted from Employed category to Unemployed Category = 100,000

Number of people shifted from Full-time to Underemployed = 100,000

In 2015:

It is given that, in the 3-year period between 2012-15, the net change to the population resulted solely from legal migration

Number of migrants who entered the labor force = 1,200,000

Unemployed among the migrants = 200,000

Underemployed among the migrants = 700,000

Total Population (Increased by 8%) = 18,000,000 x (1+ 0.08) = 19,440,000

Total Adult Population in 2015 = 15,000,000+1,200,000(migrants) = 16,200,000

Total Labor force = 10,000,000 - 200,000(Discouraged Workers) + 1,200,000(Migrants) = 11,000,000

Total Employed = 9,000,000 + 1,200,000(Migrants in Labor Force) - 100,000(Unemployed in the 3-year period) - 200,000(Umeployed among the migrants) = 9,900,000

Total Unemployed = Labor Force - Total Employed = 12,000,000-10,900,000 = 1,100,000

Total Underemployed = 1,000,000+ 100,000(Shifted from Employed to Underemployed) + 700,000(among Migrants) = 1,800,000

U-3 Rate (Official Unemployment Rate) = Unemployed/Labor Force x 100 = 1,100,000/11,000,000 x 100 = 10.00%

U-6 Rate = (Total Unemployed + Discouraged Workers + Persons employed part-time)/(Labor force + Discouraged Workers) x 100 = (1,100,000+200,000+1,800,000)/(11,000,000+200,000) x 100 = 3,100,000/11,200,000 x 100 = 27.69%