Chapter 6 Unemployment
Questions for Review
1. What are the three categories into which the Bureau of Labor Statistics divides everyone? How does
the BLS compute the labor force, the unemployment rate, and the labor-force participation rate?
2. Why is frictional unemployment inevitable? How might the government reduce the amount of
frictional unemployment?
3. Are minimum-wage laws a better explanation for structural unemployment among teenagers or
among college graduates? Why?
4. How do unions affect the natural rate of unemployment?
5. Explain four ways in which a firm might increase its profits by raising the wages it pays.
Quick Check Multiple Choice
1. The population of a small city is 100 people: 40 work fulltime, 20 work half-time but would prefer
to work fulltime, 10 are looking for a job, 10 would like to work but are so discouraged they have
given up looking, 10 are not interested in working because they are fulltime students, and 10 are
retired. What is the number of unemployed?
a. 10
b. 20
c. 30
d. 40
2. Using the numbers in the preceding question, what is the size of the city’s labor force?
a. 50
b. 60
c. 70
d. 80
3. The main policy goal of the unemployment insurance system is to reduce the
a. search effort of the unemployed.
b. income uncertainty that workers face.
c. role of unions in wage setting.
d. amount of frictional unemployment.
4. According to the theory of efficiency wages,
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a. firms may find it profitable to pay above-equilibrium wages.
b. an excess supply of labor puts downward pressure on wages.
c. sectoral shifts are the main source of frictional unemployment.
d. right-to-work laws reduce the bargaining power of unions.
Problems and Applications
1. The Bureau of Labor Statistics announced that in January 2013, of all adult Americans,
143,322,000 were employed, 12,332,000 were unemployed, and 89,008,000 were not in the labor
force. Use this information to calculate:
a. the adult population
b. the labor force
c. the labor-force participation rate
d. the unemployment rate
2. Between January 2010 and January 2013, U.S. employment increased by 4.9 million workers, but
the number of unemployed workers declined by only 2.7 million. How are these numbers consistent
with each other? Why might one expect a reduction in the number of people counted as unemployed
to be smaller than the increase in the number of people employed?
3. Economists use labor-market data to evaluate how well an economy is using its most valuable
resource—its people. Two closely watched statistics are the unemployment rate and the employment–
population ratio (calculated as the percentage of the adult population that is employed). Explain what
happens to each of these in the following scenarios. In your opinion, which statistic is the more
meaningful gauge of how well the economy is doing?
a. An auto company goes bankrupt and lays off its workers, who immediately start looking for new
jobs.
b. After an unsuccessful search, some of the laid-off workers quit looking for new jobs.
c. Numerous students graduate from college but cannot find work.
d. Numerous students graduate from college and immediately begin new jobs.
e. A stock market boom induces newly enriched 60-year-old workers to take early retirement.
f. Advances in healthcare prolong the life of many retirees.
4. Are the following workers more likely to experience short-term or long-term unemployment?
Explain.
a. a construction worker laid off because of bad weather
b. a manufacturing worker who loses his job at a plant in an isolated area
c. a stagecoach-industry worker laid off because of competition from railroads
d. a short-order cook who loses his job when a new restaurant opens across the street
e. an expert welder with little formal education who loses his job when the company installs automatic
welding machinery
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5. Using a diagram of the labor market, show the effect of an increase in the minimum wage on the
wage paid to workers, the number of workers supplied, the number of workers demanded, and the
amount of unemployment.
6. Consider an economy with two labor markets—one for manufacturing workers and one for service
workers. Suppose initially that neither is unionized.
a. If manufacturing workers formed a union, what impact would you predict on the wages and
employment in manufacturing?
b. How would these changes in the manufacturing labor market affect the supply of labor in the
market for service workers? What would happen to the equilibrium wage and employment in this
labor market?
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