Macroeconomics

Inflation and Unemployment

1. Explain the meaning of the following terms: a) the unemployed b) The

Unemployment Rate c) The Labour Force. Give examples of each,
(Chap. 20 – pgs 439-442)

The unemployed: These are individuals who are currently not working but are
actively seeking employment. In simple terms, they are people who want to work
but don't have a job now. For example, imagine someone who recently graduated
from college and is looking for their first job. Until they find employment, they
would be considered unemployed.

The Unemployment Rate: This is a measure that tells us the percentage of people
in the labour force who are unemployed. It's a way to understand how many
people within a certain population are actively looking for work but can't find it.
For instance, if a country's unemployment rate is 5%, it means that out of every
100 people who are part of the labour force, 5 are currently without a job.

The Labour Force: This refers to the total number of people who are either
employed or actively seeking employment. It includes both those who have a job
and those who are looking for one. Essentially, it's the pool of individuals
available for work within a certain population. For example, if a town has 1,000
people and 600 of them are employed while the remaining 400 are either looking
for work or able to work but not currently employed, then the labour force of that
town is 1,000 people.

2. Explain the meaning of the following terms: a) Labour Force Participation Rate
b) The Discouraged Worker Effect c) The Natural Rate of Unemployment. Give
examples of each. (Chap. 20 – pgs 439-442)

Labour Force Participation Rate: This is the percentage of working-age people

who are either employed or actively looking for a job. It gives us an idea of how
many people in a population are involved in the labour market, regardless of
whether they have a job or not. For example, there's a small town with a
population of 1,000 people aged 16 and above. Out of these, 600 are employed,
200 are actively looking for jobs, and the remaining 200 are not in the labour force
because they are students, retirees, or homemakers. So, the labour force
participation rate would be calculated as (600 employed + 200 looking for jobs) /
1000 population = 80%.

The Discouraged Worker Effect: This refers to a situation where people who
want to work give up looking for employment because they believe there are no
 opportunities available. These individuals become discouraged and stop actively
seeking work. For example, John has been searching for a job for several months
without success. Despite sending out numerous applications and attending
interviews, he hasn't received any offers. Feeling discouraged and disheartened,
John decides to stop looking for work altogether. He believes there are no suitable
job opportunities available for him in the current market, so he stays home instead
of actively seeking employment.

The Natural Rate of Unemployment: This is the level of unemployment that

exists in an economy when it's operating at full capacity, meaning there's no
cyclical unemployment (unemployment due to fluctuations in the business cycle).
It's the lowest level of unemployment achievable without causing inflation to rise
rapidly. For instance, even in a healthy economy, there will always be some level
of unemployment due to factors like people changing jobs, entering, or re-entering
the workforce, or skills mismatch. This natural rate of unemployment varies by
country and economic conditions.

3. Distinguish between frictional and structural unemployment. Give examples of

each. (Chap. 20 – pgs 439-442)
Frictional unemployment occurs when people are temporarily between jobs or
transitioning from one job to another. It's a natural part of the job search process
and occurs even in healthy economies, for example, Brandon recently moved to a
new city and left her previous job to find work in her new location. While she's
actively looking for job openings and attending interviews, she's considered
frictionally unemployed until she secures a new job. On the other hand, structural
unemployment arises from a mismatch between the skills that workers have and
the skills that employers require. It's usually caused by long-term changes in the
economy, such as technological advancements or shifts in consumer demand, for
example, let's say a factory automates many of its production processes, reducing
the need for manual labour. As a result, workers who were previously employed
in the factory may find themselves unemployed because their skills are no longer
in demand in the job market.

Why is some level of unemployment inevitable in most economies?

(Chap. 20 – pgs 443-444)
In most economies, some level of unemployment is inevitable because:
 Job Changes: People are always changing jobs for various reasons like moving to a
different country, seeking better opportunities, or starting a new career. During this
transition, they might be temporarily without a job.

 Skill Mismatches: Sometimes, the skills that workers have don't match what
employers need. This can happen due to changes in technology, consumer demand, or
 industry shifts, leading to unemployment until workers find jobs that match their
skills.

 Economic Changes: Economies are always changing. Sometimes there are ups and
downs, which can lead to temporary unemployment as businesses adjust to these
changes.