Chapter 7: Problem 12

What happens to the unemployment rate when unemployed workers are reclassified as discouraged workers?

Short Answer

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When unemployed workers are reclassified as discouraged workers, they are no longer considered part of the labor force, and they do not count as unemployed individuals. This change will result in a decrease in both the number of unemployed individuals and the total labor force. The new unemployment rate will be calculated with these new values. In most cases, this reclassification will cause the unemployment rate to decrease, as the decrease in the number of unemployed individuals is usually proportionally larger than the decrease in the labor force. However, the exact impact on the unemployment rate will depend on the proportion of these changes.

Step by step solution

Understand the components of the unemployment rate

The unemployment rate is calculated by dividing the number of unemployed individuals by the total number of individuals in the labor force, and then multiplying by 100 to express it as a percentage. The labor force consists of both the employed and unemployed individuals who were either working or actively seeking work in the last four weeks. Unemployment Rate = \(\frac{Number \; of \; Unemployed}{Total \; Labor \; Force} \times 100\)

Define discouraged workers

Discouraged workers are individuals who were previously part of the labor force but have stopped seeking employment due to the belief that they will not find a suitable job. Discouraged workers are not considered part of the labor force, as they are not actively seeking work. Therefore, they do not count as unemployed individuals in the calculation of the unemployment rate.

Reclassify unemployed workers as discouraged workers

When unemployed workers are reclassified as discouraged workers, they are no longer considered part of the labor force, as they are not seeking employment. This change will affect both the numerator (number of unemployed) and the denominator (total labor force) of the unemployment rate formula. The number of unemployed individuals will decrease, as these workers are no longer considered unemployed. The total labor force will also decrease because discouraged workers are not included in the labor force.

Calculate the new unemployment rate

After reclassifying unemployed workers as discouraged workers, we will have a new unemployment rate with a smaller number of unemployed individuals and a smaller labor force. New Unemployment Rate = \(\frac{New \; Number \; of \; Unemployed}{New \; Total \; Labor \; Force} \times 100\)

Analyze the effect on the unemployment rate

As both the numerator (number of unemployed) and the denominator (total labor force) have decreased, the impact on the unemployment rate will depend on the proportion of these changes. If the decrease in the number of unemployed is proportionally larger than the decrease in the labor force, the unemployment rate will decrease. On the other hand, if the decrease in the labor force is proportionally larger, the unemployment rate may increase. In most cases, reclassifying unemployed workers as discouraged workers will cause the unemployment rate to decrease, as these individuals are no longer counted as part of the labor force or as unemployed.