Problem 3 (20 points) 1. Classify each of the types of unemployment described be

Question

Problem 3 (20 points)

1. Classify each of the types of unemployment described below as “frictional”, “structural”, or “cyclical”. Give a brief explanation of your characterization.

a) (3 points) With the overall national unemployment rate at under 4%, hundreds of laid-off computer programmers cannot find new programming jobs.

b) (3 points) A rise in oil prices brought about by a crisis in the Persian Gulf raises costs of production and reduces profits of U.S. manufactures and other firms which use inputs made from imported oil. The ensuing decline in business investment results in a recession, raising the unemployment rate from 4.5% to 9.5% over a period of 18 months.

c) (3 points) With the Massachusetts economy expanding and the Commonwealth’s unemployment rate down to 2.5%, the state’s only auto plant shuts down, idling 1,000 workers in Framingham. These workers had been employed at the plant for an average of 20 years, and as a result had developed specialized skills which cannot readily be transferred to other occupations and industries.

2. (4 points) Suppose, in April the number of employed stood at 137.7 million while the number of unemployed stood at 8.8 million. What was the unemployment rate in April?

3. (4 points) In June there are 30,000 people classified as unemployed and the size of the labor force is 600,000. The only change between June and July is that 10,000 people give up looking for work. Compute unemployment rate in July.

Explanation / Answer

a) (3 points) With the overall national unemployment rate at under 4%, hundreds of laid-off computer programmers cannot find new programming jobs.

Frictional as the Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and can be based on the circumstances of the unemployed individual.

Since programmers lost the job and are looking for other programming job only , it is frictional unemploynment.

b) (3 points) A rise in oil prices brought about by a crisis in the Persian Gulf raises costs of production and reduces profits of U.S. manufactures and other firms which use inputs made from imported oil. The ensuing decline in business investment results in a recession, raising the unemployment rate from 4.5% to 9.5% over a period of 18 months.

Cyclical Unemploynment as Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions over time

and Since here unemploynment rate rose due to recession in the economy, It is cyclical in nature

c) (3 points) With the Massachusetts economy expanding and the Commonwealth’s unemployment rate down to 2.5%, the state’s only auto plant shuts down, idling 1,000 workers in Framingham. These workers had been employed at the plant for an average of 20 years, and as a result had developed specialized skills which cannot readily be transferred to other occupations and industries.

Structural Unemploynment as Structural unemployment is a form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers (also known as the skills gap).

Here Workers are unemployed because there are no jobs for the skill sets they have.

2. (4 points) Suppose, in April the number of employed stood at 137.7 million while the number of unemployed stood at 8.8 million. What was the unemployment rate in April?

unemployment rate in April = Unempolyed/employed+unemployed*100 = 8.8/137.7+8.8 = 8.8/146.5*100 = 6%

3. (4 points) In June there are 30,000 people classified as unemployed and the size of the labor force is 600,000. The only change between June and July is that 10,000 people give up looking for work. Compute unemployment rate in July.

unemployment rate = 20,000/600,000*100 = 3.33%

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