The Natural Rate of Unemployment This is a rather different animal and will be covered later in the semester with the Phillips curve. It is the unemployment rate which is neither so high that wages drop nor so low that wages rise. Think about that a moment. Often thought to be 5- 6% for the USA.

The Natural Rate of Unemployment The Natural Rate of Unemployment (NRU) is the sum of: frictional and structural unemployment. Notice that cyclical unemployment is not part of NRU as the NRU occurs when the economy is at full employment. (Once again about 5-6%) The NRU is often included inside a Free Response Question (essay).

The Natural Rate of Unemployment The Natural Rate of Unemployment is often set equal to these: Full employment (94 to 95% employment rate) Y*(that level of NI which occurs at full employment) Long-run Potential GDP (NI at LR-AS) NAIRU (non-accelerating inflationary rate of unemployment) To be covered with the Phillips curve. The NRU is often included inside a Free Response Question (essay).

Unemployment: review

Practice questions These are indicative of the level of knowledge about unemployment required to be a successful AP candidate. On rare occasion unemployment definitions happen on Free Response Questions. More often FRQ ask about causes for changes in unemployment (employment) levels. Other than specific unemployment questions it is often better to respond to think in terms of employment.

U-2 question 1 Labor Market Data for Country 34 (in thousands of persons) Population 190 Employed 93 Unemployed 7 Not in labor force 90 Based on the information in the table above, what is the unemployment rate for Country X? (A) 3% (B) 8% (C) 7% (D) 12% (E) 22%

U-2 question 2 The official unemployment rate understates the unemployment level in the economy because the official unemployment rate 
 (A) ignores the duration of unemployment (B) ignores underemployed and discouraged 
workers
 (C) includes jobs created by the underground 
economy
 (D) excludes all unemployed teenagers
 (E) excludes structurally unemployed workers

U-2 question 3 The unemployment rate is calculated using the numbers of people (A) not working divided by the population (B) not working divided by the number of people working both full-time and part-time (C) Not working and working part-time
but actively seeking full-time employment divided by the number of people in the labor force (D) not working but actively seeking employment divided by the number of people in the labor force (E) in the labor force divided by the population

U-2 question 4 Structural unemployment is best described as unemployment arising from 
 (A) the elimination of jobs as a result of technological change 
 (B) an increase in the number of workers searching for better-paying jobs (C) an increase in the number of jobs demanding unskilled labor 
 (D) the temporary reduction of jobs during a downturn in the business cycle (E) the reduction in jobs due to seasonal changes in demand

U-2 question 5 Which of the following will be counted as unemployed by the United States Bureau of Labor Statistics? (A) Persons who quit their previous jobs to stay at home to care for sick parents (B) Persons who were laid off from their previous jobs and have not applied for a job in two years (C) Persons who have given up looking for jobs after long searches (D) Persons who were fired from their previous jobs and are actively applying for work (E) Persons who quit their previous jobs to start their own businesses

U-2 question 6 Which type of unemployment would increase if workers lost their jobs because of a recession? (A) Cyclical (B) Frictional (C) Seasonal (D) Search (E) Structural

U-2 question 7 Frictional unemployment occurs when which of the following happens? (A) A worker is replaced by robots on factory assembly lines. (B) A worker voluntarily quits a job to search for a better one. (C) A worker is laid off because of a downturn in economic activity. 
 (D) A worker undergoes on-the-job training. (E) A worker switches from working full-time to part-time.

U-2 question 8 The natural rate of unemployment can be defined as the (A) unemployment rate consistent with accelerating inflation (B) unemployment rate of the least-skilled workers (C) The unemployment rate which doesn’t change wage rates (D) labor force participation rate plus the unemployment rate (E) labor force participation rate minus the unemployment rate

U-2 question 9 If unemployed workers become discouraged and give up trying to find work, the number of workers employed and the unemployment rate would change in which of the following ways? Number of Unemployment Workers Employed Rate (A) Decrease Decrease (B) Decrease Increase (C) Decrease No change (D) No change Decrease (E) No change Increase

Answers 1-9 1. (b) 7%. Unemployed as fraction of labor force 2. (b) Who is counted as unemployed, not the discouraged or underemployed. 3. (d) Definition of U-3. 4. (a) Unemployment type definition: structural 5. (d) Who is counted in U-3? Quit and looking. 6. (a) Unemployment type definition: cyclical 7. (b) Unemployment type definition: frictional 8. (c) Definition of NRU. 9. (d) More discouraged means fewer unemployed, and has no direct affect on over-all employment.