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Employment and unemployment — practice questions

Practice and worked examples for 2281 Employment and unemployment. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

In Country B:

  • Working-age population: 10 million
  • Employed: 5.4 million
  • Unemployed: 0.6 million
  • Economically inactive: 4.0 million

(a) Calculate the labour force and unemployment rate. (b) The economy is in recession with Y = $450bn and Yf = $500bn. Explain the type of unemployment likely to dominate. (c) Suggest one fiscal policy to reduce this unemployment and show on AD–AS.

Show solution outline

(a) Labour force = Employed + Unemployed = 5.4 + 0.6 = 6.0 million

Unemployment rate = (0.6 ÷ 6.0) × 100 = 10%

(b) Type of unemployment Y (450bn)<Yf(450bn) < Yf (500bn) → negative output gap of $50bn → cyclical (demand-deficient) unemployment dominates as firms reduce output.

(c) Fiscal policy Increase G (e.g. infrastructure) or cut taxes → AD shifts right → Y rises toward Yf → firms rehire → cyclical unemployment falls.

On AD–AS: draw AD₁ left of full capacity; AD₂ after expansionary fiscal shift; new equilibrium closer to Yf.

Worked example 2

The labour market for retail workers in a city has the following demand and supply schedules:

  • Demand: Q_d = 80,000 - 4,000W
  • Supply: Q_s = -10,000 + 5,000W Where W is the hourly wage in dollars ($), and Q is the number of workers.

(a) Calculate the equilibrium wage and quantity of labour. (b) The government introduces a minimum wage of $11 per hour. Calculate the number of workers demanded, the number supplied, and the resulting unemployment. (c) What type of unemployment is this?

Show solution outline

(a) Equilibrium To find the equilibrium, set quantity demanded equal to quantity supplied (Q_d = Q_s): 80,000 - 4,000W = -10,000 + 5,000W Add 10,000 to both sides: 90,000 - 4,000W = 5,000W Add 4,000W to both sides: 90,000 = 9,000W Solve for W: W = 90,000 / 9,000 = $10 per hour Substitute W = $10 into the demand equation to find equilibrium quantity: Q = 80,000 - 4,000(10) = 80,000 - 40,000 = 40,000 workers

(b) Minimum Wage Impact At a minimum wage of W = 11:11: Quantity Demanded (Q_d) = 80,000 - 4,000(11) = 80,000 - 44,000 = 36,000 workers Quantity Supplied (Q_s) = -10,000 + 5,000(11) = -10,000 + 55,000 = 45,000 workers Unemployment = Quantity Supplied - Quantity Demanded = 45,000 - 36,000 = 9,000 workers

(c) Type of Unemployment This is real-wage unemployment. It is caused by the wage being legally fixed above the market-clearing equilibrium wage of $10, creating an excess supply of labour.

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