Economy Today 13th Edition Schiller Solutions Manual

Economy Today 13th Edition Schiller
Solutions Manual
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Chapter 6 - Unemployment
Chapter 6: Unemployment
Solutions Manual
Learning Objectives for Chapter 6
After reading this chapter, you should know

LO 06-01. How unemployment is measured.
LO 06-02. The socioeconomic costs of unemployment.
LO 06-03. The major types of unemployment.
LO 06-04. The meaning of “full employment.”
Topics Covered in Chapter 6

LO 06-01. The Labor Force
LO 06-01. Measuring Unemployment
LO 06-02. The Human Costs
LO 06-03. Defining Full Employment
LO 06-04. Defining Full Employment
Questions for Discussion
1. Is it possible for unemployment rates to increase at the same time that the number of
employed persons is increasing? How?
Answer: Yes, it is possible and it has happened. If people enter the labor force at a rate
faster than the rate of job growth, the unemployment rate will increase at the same time that
more people are employed.
LO 06-01
AACSB: Reflective Thinking
Blooms: Analyze
2. If more teenagers stay in school longer, what happens to (a) production possibilities? (b)
unemployment rates?
Answer:
(a) The production possibilities decline as students take longer to enter the labor force.
(b) The unemployment rates may actually appear to fall since students are not part of the
labor force until they leave school.
LO 06-01
Blooms: Apply
6-1
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3. Where and when will those Las Vegas carpenters (see News, p. 122) find jobs?
Answer: Many workers who lose jobs in one industry can’t fill job openings in other
industries because they don’t have the right skills. They are victims of structural
unemployment. To become employed, these workers might have to train for a different
occupation, or move to a different location where construction workers are being hired.
LO 06-03
Blooms: Understand
4. Why might job market (re)entrants have a harder time finding a job than job losers?
Answer: People who take an extended period of absence from their jobs may find that their
skills are obsolete, they have few job contacts, and they need new training. Job losers might
have modern skills, have developed job contacts, and therefore be readily employable.
LO 06-03
Blooms: Analyze
5. Should the government replace the wages of anyone who is unemployed? How might this
affect output and unemployment?
Answer: Unintended consequences of this policy could be more people staying on

unemployment or becoming unemployed to look for a better job, causing the rate to rise.
Because of these incentives, many states limit benefits to 26 weeks and provide benefits only
to those who worked a substantial length of time and had a “good” reason for losing their
jobs.
LO 06-03
Blooms: Evaluate
6. When the GE lightbulb plant in Virginia closed (p. 113), how was the local economy
affected?
Answer: The laid-off employees were out of a job with reduced incomes. The incomes of
family and community members also were impacted. Others harmed might be employees at
firms who relied on the spending of the GE employees (restaurants, grocery stores, car
dealerships, etc.). New entrants into the labor force (students just graduating) would also
have a more difficult time finding work at reasonable salaries.
6-2
LO 06-02
Blooms: Apply
7. Why is frictional unemployment deemed desirable?
Answer: As the economy moves out of some industries and into others through economic
growth, it is necessary for people to switch their jobs out of the declining industries and into
the new industries. Frictional unemployment reflects such job switching. Furthermore,
when job switching leads to better or more productive employment, both from the point of
view of the individual and from the point of view of the employing organization, society may
be better off.
LO 06-03
Blooms: Understand
8. Why do people expect inflation to heat up when the unemployment rate approaches 4
percent?
Answer: Some economists estimate that the amount of frictional unemployment existing in
the economy is about 4 percent. At this level of unemployment, it becomes very difficult for
businesses to find qualified people to hire. To encourage workers to accept employment
offers, they must pay more than the workers are currently earning with other employers. This
causes upward pressure on wages and costs, leading to inflation.
LO 06-04
Blooms: Analyze
9. Identify (a) two jobs at your school that could be outsourced and (b) two jobs that would be
hard to outsource.
Answer: Answers could include (a) teaching online courses; online registration; (b)
janitorial services; food services.
LO 06-04
Blooms: Apply
6-3
10. How can the outsourcing of U.S. computer jobs generate new U.S. jobs in construction or
retail trade? (See News, page 127.)
Answer: Outsourcing increases U.S. productivity and profits while reducing U.S. production
costs and prices. These outcomes may increase demand for U.S. jobs by more than the
immediate job loss.
LO 06-04
Blooms: Apply
Problems
1. According to Figure 6.1 (p. 114),

(a) What percentage of the civilian labor force was employed?
(b) What percentage of the civilian labor force was unemployed?
(c) What percentage of the population was employed in civilian jobs?
Answers:
(a) 90.3%.
(b) 9.6%.
(c) 44.8%.
Feedback:
(a) 139 million/154 million = 0.90259, or about 90.3%.
(b) 14.8 million/154 million = 0.09610, or about 9.6%.
(c) 139 million/310 million = 0.44838, or about 44.8%.
LO 06-01
Topic: The Labor Force
AACSB: Analytic
Blooms: Level 2 Understand
2. If the unemployment rate in 2010 had not risen since 2008, how many more workers would
have been employed in 2010? (Use Figure 6.1 and this book’s endpapers).
Answer: 5.9 million.
Feedback: Multiplying the unemployment rate in 2008 of 5.8% by the labor force of 154
million equals 8,932,000 people unemployed, compared to 14.8 million in 2010. 5,868,000
more people would have been employed in 2010 given the lower unemployment rate.
6-4
LO 06-01
Topic: Measuring Unemployment
AACSB: Analytic
Blooms: Level 5 Evaluate
3. Between 2000 and 2010, by how much did

(a) The labor force increase?
(b) Total employment increase?
(c) Total unemployment increase?
(d) Total output (real GDP) increase?
(Note: Data on inside covers of the text.)
Answers:
(a) 11.3 million increase in the labor force.
(b) 2.2 million increase in employment.
(c) 9.1 million increase in unemployment.
(d) $1.9 trillion increase in real GDP.
Feedback:
(a) 11.3 million = Labor force year2 - Labor force year1.
(b) 2.2 million = (Labor force - Unemployment) Year2 - (Labor force - Unemployment)
Year1.
(c) 9.1 million = Unemployment year2 – Unemployment year1.
(d) 1.9 trillion = Real GDP year2 - Real GDP year1.
In thousands 2000 2010 Change

Labor force 142,583 153,889 11,306
Employment* 136,891 139,064 2,173
in millions
Unemployment 5,692 14,825 9,133
Real GDP 11,216 13,088 1,872
* Employment = LF minus UE
LO 06-01
AACSB: Analytic
6-5
4. If the labor force of 150 million people is growing by 1.5 percent per year, how many new
jobs have to be created each month to keep unemployment from increasing?
Web query: By how much did U.S. employment actually increase last month
(www.bls.gov)?
Answer: 187,500 jobs each month.
Feedback: 187,500 jobs each month. 1.5% of 150 million = 2.25 million jobs/year; 2.25
million/12 = 187,500 jobs/month.
Web query answer: Depends on current data at website www.bls.gov.
LO 06-01
AACSB: Analytic
5. Between 1980 and 2010, by how much did the labor force participation rate (Figure 6.2) of
(a) Men fall?
(b) Women rise?
Answers:
(a) 6.2%.
(b) 7.1%.
Feedback:
(a) 2010 Participation rate – 2008 Participation rate: 71.2% - 77.4% = 6.2%.
(b) 2010 Participation rate – 2008 Participation rate: 58.6% - 51.5% = 7.1%.
LO 06-01
AACSB: Analytic
Blooms: Level 1 Remember
6. According to Okun’s Law, how much output (real GDP) was lost in 2010 when the nation’s
unemployment rate increased from 9.3 percent to 9.6 percent?
Answer: $78.53 billion.
Feedback: Okun’s Law suggests that 1 percentage point more unemployment is equivalent
to a 2 percent decline in output. Subtracting 9.3 percent from 9.6 percent equals 0.3 percent.
Multiplying 0.3 percent by 2 percent equals 0.6 percent. GDP falls by 0.6 percent or $78.53
billion. (2010 real GDP = $13,088 trillion × .006).
6-6
LO 06-02
Topic: The Human Costs
AACSB: Analytic
7. Suppose the following data describe a nation’s population:
Year 1 Year 2
Population 200 million 204 million
Labor force 120 million 123 million
Unemployment rate 6 percent 6 percent
(a) How many people are unemployed in each year?

(b) How many people are employed in each year?
(c) Compute the employment rate (i.e., number employed ÷ population) in each year.
Answers:
(a) Year 1: 7.20 million.
Year 2: 7.38 million.
(b) Year 1: 112.80 million.
Year 2: 115.62 million.
(c) Year 1: 56%.
Year 2: 57%.
Feedback:
(a) Year 1: Unemployed = Labor force × Unemployment rate; 120 million × 0.06 = 7.2
million.
Year 2: Unemployed = Labor force × Unemployment rate; 123 million × 0.06 = 7.38
million.
(b) Year 1: Employed = Labor force – Unemployed; 120 – 7.2 million = 112.8 million.
Year 2: Employed = Labor force – Unemployed; 123 – 7.38 million = 115.62 million.
(c) Year: Employment rate = Employed/Population; (112.8 / 200) × 100 = 56%.
Year: Employment rate = Employed/Population; (115.62 / 204) × 100 = 57%.
LO 06-01
AACSB: Analytic
Blooms: Level 3 Apply
8. Based on the data in the previous problem, what happens (“up” or “down”) to each of the
following numbers in Year 2 when 1 million jobseekers become “discouraged workers”?
(a) Number of unemployed persons.
(b) Unemployment rate.
6-7
(c) Employment rate.
Answers:
(a) Down.
(b) Down.
(c) No change.
Feedback:
(a) Down: When the jobseekers stop looking for work, they will no longer be classified as
unemployed.
(b) Down: Given fewer “unemployed” people, the unemployment rate will drop.
(c) No change: Even though the unemployment rate declines, there will not be an increase in
the employment rate.
LO 06-01
AACSB: Analytic
Blooms: Level 3 Apply
9. According to the News on page 126, in October 2009

(a) How many people were in the labor force?
(b) How many people were employed?
Answers:
(a) 154 million
(b) 138 million
Feedback:
(a) 10.2% × Labor force = 15.7 million. 15.7 million/10.2% = 153,921,569.
(b) Employed = Labor force minus Unemployed. 153,921,569 – 15,700,000 = 138,221,569.
LO 06-01
AACSB: Analytic
10. In 2010, how many of the 800,000 black teenagers who participated in the labor market
(a) Were unemployed?
(b) Were employed?
(c) Would have been employed if they had the same unemployment rate as white teenagers?
(See Figure 6.4 for needed info.)
6-8
Answers:
(a) 344,000.
(b) 456,000.
(c) 614,400.
Feedback:
(a) 344,000: Number of black teenagers multiplied by the unemployment rate (800,000 ×
43% = 344,000).
(b) 456,000: Subtract the number of black teenagers unemployed from those in the labor
force (800,000 – 344,000 = 456,000).
(c) If black teenagers had the same unemployment rate as their white peers then 185,600
would be unemployed: (800,000 x .232= 185,600). Next, subtract this number of
unemployed from the black teenage labor force (800,000-185,600=614,400)
LO 06-01
AACSB: Analytic
11. On the accompanying graph, illustrate both the unemployment rate and the real GDP growth
rate for each year. (The data required for this exercise are on the inside cover of this book.)
(a) In how many years was “full employment” achieved? (Use the current benchmark.)
(b) Unemployment and growth rates tend to move in opposite directions. Which appears to
change direction first?
(c) In how many years does the unemployment rate increase even when output is expanding?
Answers:
Unemployment GDP Growth
Year Rate Rate
2000 4.00 3.70
2001 4.70 0.80
2002 5.80 1.60
2003 6.00 2.50
2004 5.50 3.60
2005 5.10 2.90
2006 4.60 2.80
2007 4.60 2.00
2008 5.80 -0.30
2009 9.30 -3.50
2010 9.60 3.00
6-9
(a) 8 years (using the 2011 threshold level of 6%).

(b) GDP falls first.
(c) 3 years: The unemployment rate was increasing despite rising GDP in 2002, 2003,
and 2010.
Feedback:
(a) There were 8 years (every year except 2003, 2009, and 2010) in this period when
unemployment was below 6%, which was the 2011 benchmark.
(b) GDP falls first, and unemployment follows when employers lay off employees.
(c) 3 years: The unemployment rate was increasing despite rising GDP in 2002, 2003, and
2010.
LO 06-04
Topic: Defining Full Employment
AACSB: Analytic
Blooms: Level 6 Create
12. For each situation described here determine the type of unemployment:
(a) Steelworkers losing their jobs due to decreased demand for steel.
(b) A college graduate waiting to accept a job that allows her to utilize her level of education.
(c) The Great Recession of 2008–2010.
Answers:
(a) Structural.
(b) Frictional.
(c) Cyclical.
6-10
Feedback:
(a) Structural: mismatch of skills.
(b) Frictional: people moving into the labor market.
(c) Cyclical: lack of job vacancies.
LO 06-03
Topic: Defining Full Employment
AACSB: Analytic
Blooms: Level 1 Remember
13. (a) What was the unemployment rate in 2010?

(b) How many jobs were needed to bring the unemployment rate down to the 5 percent full-
employment threshold?
(c) Using Okun’s Law, how more much would total output (GDP) have had to grow to create
that many jobs?
Answers:
(a) 9.6%.
(b) 7.131 million.
(c) 9.2%.
Feedback:
(a) 9.6% from endpaper data.
(b) 7,079,000 jobs. Multiplying the labor force of 153,889,000 by a 5% unemployment rate
equals 7,694,450 unemployed workers. Subtracting 7,694,450 from the 2010 number of
people unemployed 14,773,000 (9.6% X 153,889,000) equals the number of jobs needed
to reach full employment, 7,079,000, or 7.1 million
(c) The difference between 5% and 9.6% is 4.6%. Okun’s Law states that it takes 2% GDP
growth to attain 1% gain in employment. Therefore, double 4.6% and the result is 9.2%
GDP growth rate.
LO 06-04
Topic: Defining Full Unemployment
AACSB: Analytic
6-11

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Economy Today 13th Edition Schiller

Learning Objectives for Chapter 6

After reading this chapter, you should know

Topics Covered in Chapter 6

Questions for Discussion

Answer: Unintended consequences of this policy could be more people staying on

7. Why is frictional unemployment deemed desirable?

1. According to Figure 6.1 (p. 114),

Answer: 5.9 million.

3. Between 2000 and 2010, by how much did

In thousands 2000 2010 Change

Answer: 187,500 jobs each month.

Web query answer: Depends on current data at website www.bls.gov.

Answer: $78.53 billion.

7. Suppose the following data describe a nation’s population:

(a) How many people are unemployed in each year?

(c) Employment rate.

9. According to the News on page 126, in October 2009

(a) 8 years (using the 2011 threshold level of 6%).

13. (a) What was the unemployment rate in 2010?

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