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Economics 102
Homework #3
Due: February 15th at the beginning of class
Complete all of the problems. Please do not write your answers on this sheet. Show all
of your work.
1. Suppose the U.S. adult non-institutionalized population is 325 million people. The
labor force participation rate is 82%. There are 40 million people unemployed, and
10 million people are considered discouraged workers.
a. Calculate the number of people in the labor force, the number of people
employed, and the unemployment rate.
In order to find the size of the labor force, we need to use the following
Labor Force
equation: LFPR =
* 100 . Inserting the number from the
Adult Population
Labor Force
* 100 , or Labor Force = 0.82*325 million, so the
problem: 82% =
325 million
Labor Force = 266.5 million.
# of Employed = Labor Force - # of Unemployed:
# of Employed = 266.5 mm – 40 mm = 226.5 million.
Use the following formula: Unemployment rate =
Unemployment Rate =
# of Unemployed
*100 ,
Labor Force
40 million
*100 = 15.0%.
266.5 million
b. Would lowering unemployment to 0% be a good goal for the U.S. economy?
If not suggest an alternative goal that relates to unemployment. Explain your
ideas (Hint: think about frictional, structural and cyclical unemployment).
If the unemployment rate was 0%, that means that every person who wanted a
job had one. In one sense this would be good. However, if there was no one
looking for work then when a firm wanted to hire another worker they would
have to hire them away from their current job. This would cause wages to
rise, but that might not be a good thing. In order to have 0% unemployment,
every college graduate would have to start working immediately upon
graduation and no one could ever be fired. Allowing graduates a little time to
search for the perfect job is probably a good thing.
A better goal for the U.S. economy would be to try to eliminate structural
unemployment. Structural unemployment occurs because the labor market is
not in equilibrium. If wages are pushed artificially high, then some workers
will lose their jobs. If the government could intervene in the labor market in
order to keep it in equilibrium this would be a good way to lower
unemployment. You could also argue that the government intervening in the
labor market would only make things worse, so this is not a very good idea
either.
Another possibility is for the government to try and reduce frictional
unemployment. If the government could figure out a way to better match
unemployed people with available jobs, so that time between jobs was
reduced, this would help to lower unemployment. Also the government could
provide training for workers that were laid off. This training would help them
to be qualified for more different jobs, which should reduce the amount of
time they spend unemployed.
A third goal might be to try and increase the Labor Force Participation
Rate (LFPR). If the LFPR were higher that would mean that more people
were in the work force, so we might have more people working even though
unemployment did not decrease. The down side of this goal would be that the
people already in the labor force who are unable to find jobs, would have even
more difficultly due to the increased competition.
c. Currently discouraged workers are not counted as unemployed. Do you think
this is the proper way to treat people who would work if given the chance?
Explain your answer.
Whether or not discouraged workers should be counted as unemployed is still
a subject of debate, so there is no right or wrong answer to this question. The
interesting thing to note is that if we include discouraged workers as part of
the unemployed, then the unemployment rate will increase. So if we want
unemployment statistics to look better, we will put discouraged workers in the
Not in the Labor Force category.
2. The following is actual data from the Bureau of Labor Statistics (numbers in
000’s):
Data for U.S. non-institutionalized, age 16 and over.
1997
2000
Population
202,285
211,410
Labor Force
135,456
142,279
LFPR
67.3%
67.0%
# Employed
128,298
136,588
# Unemployed
7,158
5,691
# Not in LF
66,829
69,131
Unemp. Rate
4.0%
5.28%
2003
219,897
145,943
66.4%
137,421
8,522
73,954
5.84%
2006
227,458
150,122
66.0%
143,066
7,056
77,336
4.7%
a. Fill in the blanks in the above chart.
b. What trends do you notice in the data? What might these trends mean?
There are a couple of trends. We can see that population is steadily increasing
over the period. This is not surprising at all, at the same time the number of
people in the labor force is also increasing over time. However, the LFPR
rises a little in 2000, then declines by over 1%. This is a fairly significant
decline. To see why let’s look at what the size of the labor force would be if
the LFPR was the same as in 2000. If there was not the decline in the LFPR
then would be almost 3 million additional members in the work force in 2006.
If all of the 3 million potential workers were discouraged workers, then the
2006 unemployment rate is vastly understated. So, what are some possible
reasons for the drop in LFPR. One possibility is the aging of the population.
As the baby boomers begin to retire, the number of retired people in the
population may be increasing on a percentage basis. Alternatively, the change
could be because discouraged workers are dropping out of the labor force. A
third possibility is that more families are returning to one income families,
causing women to drop out of the labor force. A final possibility is that more
younger potential workers are staying in school for longer periods of time,
thus make the labor force participation rate fall.
We can also see that the unemployment rate is going up and down and up and
down. This lends evidence to the theory that there is a natural rate of
unemployment that the measured unemployment rate fluctuates around. If the
natural rate of unemployment were 5.0%, then this is exactly the pattern of
unemployment that we would expect.
Data for U.S. non-institutionalized, age 16 - 19.
1997
2000
Population
15,318
15,987
Labor Force
7,930
8,345
LFPR
52.2%
51.8%
# Employed
6,595
7,285
# Unemployed
1,335
1,060
# Not in LF
7,642
7,388
Unemp. Rate
12.7%
16.8%
2003
16,028
7,362
45.9%
6,096
1,266
8,666
17.2%
2006
16,515
7,178
43.5%
6,090
1,088
9,337
15.2%
c. Fill in the above table which contains data for teenagers.
d. Are the trends in the teenage data similar or different from the entire adult
population? Specifically, which things move in the same direction and
which move in the opposite direction? Also comment on whether the size
of the changes is the same.
The overall trends are similar, as would be expected, because this is a subset
of the above chart. One significant difference is that the number of people in
the labor force actually falls. This leads to a large decline in the LFPR. We
can use this to figure out that more than half of the decline in LFPR seen
among the entire working population came from teenagers. This is
significant, because if the decline in the LFPR for all ages is due to an
increase in discouraged workers, then we have a hidden problem. But if the
decline is simply due to the fact that more teenagers are choosing to go to
college, we don’t need to worry.
There is also a much larger fluctuation in the unemployment rate, which will
be discussed in part e.
e. Compare the unemployment rates among all workers, with the rate among
teenagers. Is the difference something you would expect? Why?
A much higher percentage of teenagers are unemployed compared to the
overall population of workers. If we removed the teenage population from the
numbers in the first chart, the unemployment rate would be even lower, and
the difference would be starker. There are two main reasons why the
unemployment rate is higher among teenagers. The first is that teenagers have
less education and thus fewer skills. This means there is a smaller number of
jobs open to them. Additionally, teenagers have little work experience. This
makes them the first ones to be fired when a firm is downsizing, and the last
to be hired when a firm is expanding.
f. Offer a possible explanation for the trend in teenage labor force
participation.
Teenagers have been dropping out of the labor force at a pretty high rate.
They may be dropping out for two reasons. The first is that if the wealth of
the nation as a whole is increasing, as it has been, fewer teenagers need to
work to help support their families. This allows them to stay at home and
play/study. Second, if a larger proportion of teenagers are deciding to get a
post-secondary education there will be fewer participating in the labor force
because full time students count as being not in the labor force.
Note: Be careful to understand the distinction between parts e and f. Lots of
people confused reasons teenagers are unemployed, with reasons they dropped
out of the labor force. These are two separate and independent issues.