Employment/unemployment — practice questions

(a) Calculate the Labour Force: The labour force includes all individuals who are either employed or unemployed.

1. First, determine the working-age population:
   • Working-age Population = Total Population - Population under 16/institutionalized
   • Working-age Population = 50 million - 10 million = 40 million.
2. The working-age population is divided into those in the labour force and those not in the labour force.
   • Labour Force = Working-age Population - Not in Labour Force
   • Labour Force = 40 million - 15 million = 25 million.

(b) Calculate the Number of Unemployed: The labour force is composed of the employed and the unemployed.

• Unemployed = Labour Force - Employed
• Unemployed = 25 million - 23 million = 2 million.

(c) Calculate the Unemployment Rate: The unemployment rate is the percentage of the labour force that is unemployed.

• Formula: $\text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labour Force}} \times 100$
• Calculation: $\text{Unemployment Rate} = \frac{2,000,000}{25,000,000} \times 100 = 0.08 \times 100 = 8.0\%$
• The unemployment rate is 8.0%.

(a) Types present:

• Cyclical: 8% > NAIRU 5% → 3 percentage points of demand-deficient unemployment — falling inflation confirms weak AD.
• Structural: Manufacturing closures from foreign competition → skills mismatch, regional job losses — workers may lack skills for new sectors.
• Frictional: Always present — workers between jobs.

(b) Monetary policy case (expansionary):

• Lower interest rates → ↑ I and C → AD shifts right → reduces cyclical unemployment toward NAIRU.
• Falling inflation gives room to cut rates without immediate overheating concern.

Limitations:

• Structural unemployment unaffected by AD — redundant manufacturing workers need retraining, not just lower rates.
• Time lags — monetary policy takes 12–18 months to work fully.
• Liquidity trap risk if rates already near zero — may need fiscal or supply-side support.
• Cutting rates may weaken currency — helps exporters but raises import prices (cost-push inflation risk).

Judgement: Expansionary monetary policy helps the cyclical component but is insufficient alone — needs supply-side measures (retraining, regional development) for structural unemployment.