Consider a hypothetical economy in which the labor force consists of 200 people. Of those, 180 people are employed full-time and 20 people are unemployed. The economy follows the same conventions as the U.S. Bureau of Labor Statistics (BLS) in computing its employment figures. Therefore, initially the unemployment rate is calculated as follows: Unemployment Rate = Number of Unemployed People Number of People in the Labor Force x 100 20 x 100 %3D 200 = 10% Suppose a reduction in foreign demand for this economy’s products causes an economic recession-a prolonged period of declining output. The following table offers two possible scenarios resulting from the recession.
The Correct Answer and Explanation is :
To calculate the unemployment rate in the given economy, we use the formula provided:
[
\text{Unemployment Rate} = \frac{\text{Number of Unemployed People}}{\text{Number of People in the Labor Force}} \times 100
]
From the information in the problem, initially:
- Number of unemployed people = 20
- Number of people in the labor force = 200
Thus:
[
\text{Unemployment Rate} = \frac{20}{200} \times 100 = 10\%
]
Scenario: Economic Recession
During a recession, businesses typically experience lower demand for their products and may reduce their workforce or cut back on hiring. As a result, the number of unemployed people is likely to rise, leading to an increase in the unemployment rate.
There are two potential outcomes in such a situation:
Scenario 1: The unemployment rate rises because more people lose their jobs.
- Suppose that 10 people lose their jobs due to the recession. Now, the number of unemployed people becomes 30.
- The labor force remains the same at 200 people (since we assume the labor force doesn’t change in this scenario, meaning no one drops out of the labor force).
New unemployment rate:
[
\text{Unemployment Rate} = \frac{30}{200} \times 100 = 15\%
]
Scenario 2: More people become discouraged and stop looking for work.
- In this case, the number of people in the labor force might decrease because some people stop actively looking for a job.
- Suppose 5 people decide to stop looking for work, meaning the labor force decreases to 195.
- The number of unemployed people is still 20.
New unemployment rate:
[
\text{Unemployment Rate} = \frac{20}{195} \times 100 = 10.26\%
]
Conclusion:
- Scenario 1 results in a higher unemployment rate due to more people being unemployed but no change in the labor force.
- Scenario 2 results in a smaller increase in the unemployment rate because fewer people are in the labor force, despite the same number of unemployed individuals.
Both scenarios demonstrate how a recession can lead to different impacts on the unemployment rate depending on whether people remain actively looking for work or drop out of the labor force.
I will now generate a visual representation of the unemployment rate in each scenario.
Here is the visual representation of the unemployment rate in the three different scenarios:
- The initial unemployment rate is 10%.
- Scenario 1 (more people unemployed due to the recession) leads to an unemployment rate of 15%.
- Scenario 2 (discouraged workers stop looking for jobs) causes a slight increase to 10.26%.
This chart highlights how changes in employment conditions during a recession can affect the unemployment rate in different ways.
