Chapter 24 — Exercises

Section A — Measurement

A1. In a city of 200,000 people 16+: 120,000 are employed, 10,000 are unemployed, 70,000 are not in the labor force. Compute: (a) labor force, (b) unemployment rate, (c) participation rate.

A2. If 5,000 of the 70,000 not in the labor force are discouraged workers, what would U-6 approximately be? (Assume no additional marginally attached or part-time-for-economic-reasons.)

A3. The unemployment rate fell from 6% to 5.5%, but the participation rate also fell from 63% to 62%. Did the labor market actually improve? Explain.

A4. Look up the current U-3, U-6, and participation rate on FRED. What story does each tell?

Section B — Types of unemployment

B1. Classify each as frictional, structural, or cyclical: (a) A recent college graduate searching for her first job. (b) A coal miner in WV whose mine closed permanently. (c) A restaurant worker laid off during a recession. (d) A programmer who quit to find a better-paying job. (e) A factory worker replaced by a robot.

B2. Why is some frictional unemployment actually healthy for the economy?

B3. The China shock (Chapter 9) displaced manufacturing workers. Was this structural or cyclical unemployment? What's the difference in policy response?

B4. During the COVID recession, unemployment spiked to 14.7%. Was most of this frictional, structural, or cyclical? How do you know?

Section C — NAIRU and policy

C1. If the unemployment rate is 3% and NAIRU is estimated at 4.5%, what does the Phillips curve framework predict about inflation?

C2. Why does the natural rate change over time? Give two reasons it might fall and two reasons it might rise.

C3. The Fed tries to keep unemployment near NAIRU. What happens if it pushes unemployment too far below NAIRU?

Section D — Long-term unemployment and hysteresis

D1. Why is long-term unemployment (27+ weeks) qualitatively worse than short-term? Give four reasons.

D2. "Hysteresis means that a recession can permanently scar the labor market." Explain using the 2008 recession as an example.

D3. An audit study sends identical résumés to employers — half with a current employment gap of 6 months and half with no gap. The gapped résumés get 45% fewer callbacks. What does this tell you about the costs of long-term unemployment?

Section E — Racial disparities

E1. Black unemployment has been roughly 2× white unemployment for 70 years. List four contributing factors.

E2. "If we just eliminate discrimination, the racial unemployment gap will close." Evaluate. Would eliminating hiring discrimination alone be sufficient?

Section F — The two anchor recessions

F1. Compare the 2008 and COVID recessions on: (a) peak unemployment, (b) cause, (c) speed of recovery, (d) size of fiscal response.

F2. Why was the COVID recovery so much faster than the 2008 recovery? Apply the fiscal policy framework.

F3. Look up the Riverside Foods layoff from Chapter 5's housing case study. If Riverside closes a production line and lays off 100 workers, classify the resulting unemployment (frictional, structural, or cyclical — or a mix).

Section G — Data lookup

G1. Look up UNRATE on FRED. Identify every recession since 1948 by the unemployment spike. Which recession produced the highest unemployment? The fastest recovery?

G2. Compare U-3 (UNRATE) and U-6 (UNRATENSA or U6RATE) since 2005. When was the gap largest? What was happening in the economy at that time?

G3. Look up labor force participation (CIVPART) since 1948. When did it peak? What's the current level?

Section H — Policy debate

H1. "Unemployment insurance discourages job search and should be reduced." Apply the moral hazard framework. What does the empirical evidence say?

H2. "The government should guarantee a job to anyone who wants one." Evaluate. What would this cost? What would be the benefits?

H3. "Automation will cause permanent structural unemployment." Apply the automation discussion from Chapter 21.

Section I — Reflection

  • Which type of unemployment concerns you most for your own career: frictional, structural, or cyclical?
  • The racial unemployment gap has persisted for 70 years. Why hasn't it closed? What would it take?
  • Have you or someone you know experienced long-term unemployment? What was the experience like?

Selected answers in appendices/answers-to-selected.md.