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© 2018 Pearson Education, Inc.

C h a p t e r

5 MONITORING JOBS
AND INFLATION**

© 2018 Pearson Education, Inc.


Answers to the Review Quizzes
Page 116 (page 524 in Economics)
1. What determines if a person is in the labor force?
Workers who have a job and workers who are unemployed are in the labor force. To be
“officially” counted as unemployed, and thus in the labor force, means that the person does not
have a job but is available and willing to work and has made some effort to find work within the
past four weeks, or waiting to be called back to a job from which he or she has been laid off, or
waiting to start a new job within 30 days.
2. What distinguishes an unemployed person from one who is not in the labor force?
A general definition of unemployment is a person who wants to work but does not have a job. A
person who is not in the labor force does not have a job and does not want one. More specifically
to be considered as unemployed, and thus in the labor force, the person must not have a job but
must be available and willing to work. The person must also have made some effort to find work
within the past four weeks, or be waiting to be called back to a job from which he or she has been
laid off, or be waiting to start a new job within 30 days.
3. Describe the trends and fluctuations in the U.S. unemployment rate from 1980 to 2017.
The unemployment rate has had several significant fluctuations around its average of 6.4 percent.
It started by soaring to a high that exceeded 10 percent during the 1982 recession. Then there was
a gradual downward trend particularly insofar as the peaks during the recessions in 1990-1991 and
2001 were much lower than in 1982. But that situation reversed itself with the severe and
prolonged recession of 2008-2009 when the unemployment once more jumped (slightly) above 10
percent. Since that peak the unemployment rate has fallen to around 4.5 percent.
4. Describe the trends and fluctuations in the U.S. employment-to-population ratio and labor
force participation rate from 1980 to 2017.
The labor force participation rate and the employment-to-population ratio had an upward trend
from 1980 until about 2000 after which they turned downward. Both show fluctuations around
these trends, especially the employment-to-population ratio which rises during expansions and
falls during recessions but its fall between 2008 and 2010 was particularly severe. The labor force
participation rate also fell between 2008 and 2010 but the fall was not as dramatic. Recently the
labor force participation rate has leveled off and been near 63 percent and the employment-to-
population ratio has turned back up and been near 60 percent.
5. Describe the alternative measures of unemployment.
The Bureau of Labor Statistics keeps track of 6 alternative measures of unemployment:
 U-1 measures long-term unemployment. It counts as unemployed only workers who have
been unemployed for 15 or more weeks.
 U-2 measures job losers; that is, only workers who lost their jobs (as opposed to quitting
or reentering the labor market) are counted as unemployed.
 U-3 is the conventional measure of unemployment.
 U-4 adds discouraged workers to the conventional measure of unemployment.
 U-5 adds all marginally attached workers to the U-4 measure of unemployment.
 U-6 adds part-time workers who would like a full-time job (economic part-time workers)
to the U-5 measure of unemployment.

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68 CHAPTER 5

Page 119 (page 527 in Economics)


1. Why does unemployment arise and what makes some unemployment unavoidable?
In a dynamic economy some unemployment is unavoidable. For instance, growth means that some
workers will always be entering the labor force without a job and therefore be unemployed.
Consumers changing their demand for one good over another means workers in the newly less-
favored industry will lose their jobs and also be unemployed. Moreover some workers will always
be leaving their current job to search for a better job and these workers, too, will be unemployed.
So some unemployment is unavoidable as the economy churns and reacts to changes.
2. Define frictional unemployment, structural unemployment, and cyclical unemployment. Give
examples of each type of unemployment.
Frictional unemployment is the unemployment that arises from the normal labor turnover from
people entering and leaving the labor force and from the ongoing creation and destruction of jobs.
For instance, newly graduated students entering the labor market looking for work are frictionally
unemployed. Structural unemployment represents the unemployment created by changes in
technology or international competition that change the skills needed to perform jobs or change
the locations of jobs in the economy. For instance, workers are structurally unemployed if they
lose their jobs because of changes in the amount of foreign competition and if they have different
skills from those required by new jobs or if they live in a different region of the country from
where new jobs are being created. Finally, cyclical unemployment is the unemployment created by
business cycle fluctuations in economic activity. Specifically the higher than normal
unemployment at a business cycle trough and the lower than normal unemployment at a business
cycle peak is called cyclical unemployment. For instance, a worker laid off in 2009 because of the
recession is cyclically employed.
3. What is the natural unemployment rate?
The natural unemployment rate is the unemployment rate when no cyclical unemployment exists.
That is, when all unemployment is frictional or structural then the unemployment rate equals the
natural unemployment rate. Full employment occurs when there is no cyclical unemployment and
the unemployment rate equals the natural unemployment rate.
4. How does the natural unemployment rate change and what factors might make it change?
Changes in the natural unemployment rate arise because of changes in frictional and structural
unemployment. Any factor that changes frictional unemployment or structural unemployment
changes the natural unemployment rate. For instance, a change in the age distribution of the
population, a change in the scale of structural changes that are occurring, a change in the
minimum wage rate or efficiency wages, or a change in unemployment benefits all change the
natural unemployment rate.
5. Why is the unemployment rate never zero, even at full employment?
The unemployment rate is never zero because there is always churning going on the economy.
There are always new workers entering the labor market and searching for work, there are always
workers leaving one job to search for another, better job, and there are always firms laying off
workers. All these cases lead to unemployment as the workers search for a job.
6. What is the output gap? How does it change when the economy goes into recession?
The output gap equals the difference between real GDP and potential GDP. When the economy
goes into a recession, the output gap becomes negative.

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MONITORING JOBS AND INFLATION 69

7. How does the unemployment rate fluctuate over the business cycle?
During a recession the unemployment rate is generally rising. During an expansion the
unemployment rate is generally falling.

Page 125 (page 533 in Economics)


1. What is the price level?
The price level is the average level of prices.
2. What is the CPI and how is it calculated?
The CPI is the Consumer Price Index. The CPI equals (Cost of CPI basket at current prices ÷ Cost
of CPI basket at base-period prices) ×100.
3. How do we calculate the inflation rate and what is its relationship with the CPI?
The inflation rate is the percentage change in a price index from one year to the next. The rate of
change of the CPI is often used as a measure of inflation as faced by consumers.
4. What are the four main ways in which the CPI is an upward-biased measure of the price level?
The CPI is biased upward because of the new goods bias; the quality change bias; commodity
substitution bias; and outlet substitution bias. The new goods bias reflects the point that new
goods, such as DVDs are generally more expensive than the old goods they replace, VHS tapes.
The quality change bias points out that part of the reason goods and services rise in price is
because their quality is improved. Commodity substitution bias occurs because consumers
substitute away from goods and services that have risen in the price more than other goods and
services. Outlet substitution bias occurs because consumers will use discount stores more
frequently when goods and services rise in price.
5. What problems arise from the CPI bias?
The upward bias in the CPI distorts private contracts and government outlays that include formulas
based on CPI change as a measure of inflation. If the intent is to maintain the real value of a
payment, indexing payments to the CPI will in fact increase the real value of payments over time
if the CPI has an upward bias. In one year, the effect of the bias may not be much, but it will
accumulate over time.
6. What are the alternative measures of the price level and how do they address the problem of
bias in the CPI?
The first of three alternative price level is the chained CPI. The chained CPI is calculated in a
similar manner as chained-dollar real GDP. The chained CPI overcomes the commodity
substitution and new goods bias because it uses current as well as previous period quantities. The
second alternative price level is the personal consumption expenditure deflator or PCE deflator.
The PCE deflator is calculated from real and nominal consumption expenditure. The PCE deflator
uses a broader basket of goods and services than the CPI and, similar to the chained CPI, is also
calculated using a chained method. The third alternative is the GDP deflator. The GDP deflator is
similar to the PCE deflator except the GDP deflator uses the prices from all the goods and services
included in GDP.

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70 CHAPTER 5

Answers to the Study Plan Problems and Applications


1. The BLS reported the following data for January 2017:
Labor force: 160 million
Employment: 152 million
Working-age population: 254 million
Calculate the
a. Unemployment rate.
The unemployment rate is 5.0 percent. The unemployment rate is the percentage of the labor force
that is unemployed. The labor force is the sum of the people unemployed and the people
employed. So the number of people who are unemployed is 160 million minus 152 million, which
is 8 million. The unemployment rate equals (the number of people unemployed divided by the
labor force) multiplied by 100. That is, (8 million/160 million)  100, which is 5.0 percent.
b. Labor force participation rate.
The labor force participation rate is 63.0 percent. The labor force participation rate is the
percentage of the working-age population that is in the labor force. The working-age population is
254 million and the labor force is 160 million, so the labor force participation rate is (160
million/254 million) 100, which equals 63.0 percent.
c. Employment-to-population ratio.
The employment-to-population ratio is 59.8 percent. The employment-to-population ratio is the
percentage of the people of working age who have jobs. The employment-to-population ratio is
equal to the number of people employed divided by the working-age population then multiplied by
100. The employment-to-population ratio is (152 million/254 million)  100, which is 59.8
percent.
2. In July 2017, in the economy of Sandy Island, 10,000 people were employed, 1,000 were
unemployed, and 5,000 were not in the labor force. During August 2017, 80 people lost their
jobs and didn’t look for new ones, 20 people quit their jobs and retired, 150 unemployed
people were hired, 50 people quit the labor force, and 40 people entered the labor force to look
for work. Calculate for July 2017
a. The unemployment rate.
The unemployment rate in July is 9.1 percent. The unemployment rate is the number unemployed
as a percentage of the labor force. The number of unemployed workers is 1,000. The labor force is
the number employed plus the number unemployed so in July it is 11,000. The unemployment rate
equals (1,000/11,000)  100, which is 9.1 percent.
b. The employment-to-population ratio.
The employment-to-population ratio is 62.5 percent. The employment-to-population ratio is the
number employed as a percentage of the working-age population. The number of employed people
is 10,000. The working-age population is the sum of the labor force and the number of people who
are not in the labor force, which is 16,000. The employment-to-population ratio is (10,000/16,000)
 100, which is 62.5 percent.
And calculate for the end of August 2017
c. The number of people unemployed.
The number of people who are unemployed at the end of August is 840. The number of people
who are unemployed at the end of August equals the number unemployed in July plus the number
of people who lost their job and who stayed in the labor market plus the number of people entering
the labor market minus the number of people who were hired minus the number of people who left
the labor market. So the number of people unemployed equals 1,000 + 40  150  50, which is
840.

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MONITORING JOBS AND INFLATION 71

d. The number of people employed.


The number of people who are employed at the end of August is 10,050. The number of people
who are employed at the end of August equals the number employed in July minus the people
whom lost their jobs plus the number of people who gained jobs.
e. The unemployment rate.
The unemployment rate at the end of August is 7.7 percent. The unemployment rate equals the
number unemployed expressed as a percentage of the labor force. The number of people who are
unemployed is 840. The labor force equals the number employed plus the number unemployed and
at the end of August it is 10,890. The unemployment rate at the end of August equals (840/10,890)
 100, which is 7.7 percent.
Use the following data to work Problems 3 and 4.
In June 2015, the U.S. unemployment rate was 5.2 percent. In June 2017, the unemployment rate
was 4.4 percent. Predict what happened to:
3. Unemployment between June 2015 and June 2017, if the labor force was constant.
If the labor force is constant, the only way the unemployment rate can decrease is if the number of
unemployed workers decreases.
4. The labor force between June 2015 and June 2017, if unemployment was constant.
If unemployment is constant, the only way the unemployment rate can decrease is if the labor
force increases.
5. Hiring Rise Sends U.S. Jobless Rate to a 10-Year Low
The U.S. unemployment rate fell to 4.4 percent. There was also a drop in the numbers of
discouraged workers, which lowered a broader measure of unemployment that includes this
category.
Source: The New York Times, May 6, 2017
What is a discouraged worker? Explain how a decrease in discouraged workers influences the
official unemployment rate and a broader measure. What is the broader measure?
A discouraged worker is a person who currently is not working, would like a job, has looked for
one in the recent past, but has stopped looking for work because of repeated failures in finding a
job. If a worker who had not been looking for work starts looking, the official unemployment rate,
U-3, rises (until the worker finds a job). U-4 includes discouraged workers among the ranks of the
unemployed so when the worker starts looking for work and is no longer a discouraged worker, the
U-4 unemployment rate does not change.
Use the following news clip to work Problems 6 and 7.
A Tough Search for Workers as Hiring Lags Job Openings
Job openings increased 82,000 to 5.43 million, and employers are having a tough time finding
qualified workers to fill them. Hiring to fill openings increased 30,000 to 5.2 million. An economist
commented that job openings are high relative to unemployment, which is a sign of a mismatch
between the skills demanded and the skills available.
Source: The New York Times, January 13, 2016
6. If the labor market is working properly, why would there be any unemployment at all?
Unemployment will always exist in the labor market because of normal labor market frictions.
People newly entering the labor market, workers quitting a job to look for a better job, firms
laying-off workers because consumers no longer want to buy the goods produced by the firms will
always be part of the labor market. All of these events create unemployment, so even when the
labor market is operating at peak efficiency, unemployment will always be present.

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72 CHAPTER 5

7. Are workers who cannot find jobs because of mismatching in the labor market counted as part
of the economy’s structural unemployment or part of cyclical unemployment?
These workers are unemployed as the result of a mismatch between their skills and the skills
required for the available jobs. The mismatch means that these workers are part of the economy’s
structural unemployment.
Use the following information to work Problems 8 and 9.
The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought
in 2013. The average household spent $60 on juice and $30 on cloth in 2013 when the price of juice
was $2 a bottle and the price of cloth was $5 a yard. In 2014, juice is $4 a bottle and cloth is $6 a
yard.
8. Calculate the CPI basket and the percentage of the household’s budget spent on juice in 2013.
The CPI basket is 30 bottles of juice and 6 yards of cloth. The total amount spent on the CPI
basket in 2012 was $90 and of that $60 was spent on juice. The percentage of the household’s
budget spent on juice was ($60/$90) × 100, which is 66.7 percent.
9. Calculate the CPI and the inflation rate in 2014.
The CPI in 2014 is 173.3. To calculate the CPI, divide the value of the CPI basket in 2014 prices
by the base-year value of the CPI basket and then multiply the resulting number by100. The value
of the CPI basket in 2014 prices is: ($4  30) + ($6  6) = $156. The value in base-year prices is
$60 + $30 (provided in the question), which equals $90. So the CPI is ($156/$90)  100 = 173.3.
The inflation rate in the 2014 is 73.3 percent. The inflation rate equals the CPI in 2014 year minus
the CPI in the base year expressed as a percentage of the base-year CPI. Because the base-year
CPI is 100, the inflation rate is [(173.3 – 100)/ 100] × 100 = 73.3 percent.
Use the following data to work Problems 10 to 11.
The BLS reported the following CPI data:
June 2014 238.3
June 2015 238.6
June 2016 241.0
10. Calculate the inflation rates for the years ended June 2015 and June 2016. How did the
inflation rate change in 2016?
The inflation rate for the year ended June 2015 is 0.1 percent; the inflation rate for the year ended
June 2016 is 1.0 percent.
The inflation rate is the percentage change in the price level. It is equal to [(Pthis year – Plast year)/
Plast year]  100. For the year ended in June 2015 the inflation rate is [(238.6 – 238.3)/238.3]  100,
which is 0.1 percent. For the year ended in June 2016 the inflation rate is [(241.0 – 238.6)/238.6] 
100, which is 1.0 percent. The inflation rate increased in 2016.
11. Why might these CPI numbers be biased? How can alternative price indexes avoid this bias?
The CPI numbers might be biased because of the new goods bias, the quality change bias, the
commodity substitution bias, and the outlet substitution bias. The new goods bias is that new
goods are often more expensive than the older goods that they replace. The quality change bias is
that increases in the quality of a good are often accompanied by increases in the good’s price. The
commodity substitution bias reflects the point that consumers will buy less of a good whose price
increased and more of a good whose price has not changed. Finally the outlet substitution bias
points out that when prices rise, consumers shop more frequently at stores with cheaper prices.
Each of the alternative price indexes attempts to overcome some of the bias in the CPI numbers.
The chained CPI uses prices and quantities from the previous period and the current period. The

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MONITORING JOBS AND INFLATION 73

chaining process overcomes the commodity substitution process. And because it contains current
period quantities, it also does not suffer from the new goods bias. The personal consumption
expenditure deflator contains goods and services omitted from the CPI. It is calculated from the
nominal and real consumption expenditure data and so it, too, is computed using a chaining
procedure. Because the personal consumption expenditure deflator is calculated using a chaining
procedure, it does not suffer from the commodity substitution bias or the new goods bias. The
GDP deflator is calculated from nominal and real GDP data. It is broader than the personal
consumption expenditure deflator because it contains goods and services in consumption
expenditure, investment, government expenditure, and net exports. The GDP deflator is calculated
using a chaining procedure and so it also avoids the commodity substitution bias and new goods
bias.

© 2018 Pearson Education, Inc.


74 CHAPTER 5

Answers to Additional Problems and Applications


12. What is the unemployment rate supposed to measure and why is it an imperfect measure?
Ideally the unemployment rate would measure the underutilization of labor resources. But it is an
imperfect measure for two reasons. First the unemployment rate does not include some
underutilized labor. In particular the unemployment rate completely omits marginally attached
workers, such as discouraged workers. These workers are not included in the unemployment rate.
Second the unemployment rate counts as fully employed workers who are working part time but
who want full-time jobs. These workers are underutilized because they would like to work for
more hours than is presently the case.
13. The BLS reported the following data for February 2017:
Labor force participation rate: 63 percent
Working-age population: 254 million
Employment-to-population ratio: 60
Calculate the
a. Labor force.
The labor force participation rate equals the labor force divided by the working-age population
then multiplied by 100. Rearranging this formula shows that the labor force equals the working-
age population multiplied by the labor force participation rate then divided by 100. Using this last
formula and the data given in the problem shows that the labor force equals 254 million × 63/100,
which is 160.0 million.
b. Employment.
The employment-to-population ratio equals employment divided by the working-age population
then multiplied by 100. Rearranging this formula shows that employment equals the working-age
population multiplied by the employment-to-population ratio then divided by 100. Using this last
formula and the data given in the problem shows that employment equals 254 million × 60/100, or
152.4 million.
c. Unemployment rate.
The unemployment rate equals the number of people unemployed divided by the labor force. The
labor force, from part (a), is 160.0 million. The labor force equals the number of people employed
plus the number of people unemployed. Employment, from part (b), is 152.4 million so the
number of people unemployed is 7.6 million. The unemployment rate equals the number of people
unemployed divided by the labor force, then multiplied by 100. Using this last formula shows that
the unemployment rate equals (7.6 million/160.0 million) × 100, which is 4.8 percent.
14. Jobs and Wages Notch Gains as the Economy Tries to Heal
Hiring in recent months has hit a pace last seen during the late 1990s and the labor force
participation rate has started to rise but it remains significantly below its pre-recession level of
2007.
Source: The New York Times, April 1, 2016
a. If all the newly hired people had been unemployed, how would the labor force participation
rate and unemployment rate have changed?
The labor force would not have changed, so the labor force participation rate would not have
changed. The number of people unemployed would have decreased so the unemployment rate
would have fallen.

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MONITORING JOBS AND INFLATION 75

b. If all the newly hired people had previously given up on their job search, how would the
labor force participation rate and unemployment rate have changed?
The labor force would have increased, so labor force participation rate would have risen. The
number of people unemployed would not have changed but the increase in the labor force means
that the unemployment rate would have fallen.
15. The BLS reported that in the second quarter of 2016, employment increased by 100,000 to
150,959,000 and the unemployment rate fell from 5 percent to 4.9 percent. About 1.3 million
people were marginally attached workers and 0.6 million of them were discouraged.
a. Calculate the change in unemployment in the second quarter of 2016.
At the start of the second quarter employment was 150,959,000 − 100,000 = 150,859,000. The
unemployment rate, which at the start of the second quarter was 5.0 percent, equals
(Unemployment/[Unemployment + Employment]) × 100. Using the data for the start of the second
quarter gives the result that 0.050 = (Unemployment/[Unemployment + 150,859,000]). Solving for
the amount of unemployment shows that unemployment at the start of the second quarter was
7,939,947 workers. Similar calculations show that at the end of the second quarter the amount of
unemployment was 7,778,118 workers. Unemployment decreased in the second quarter by
161,829 workers.
b. With 1.3 million marginally attached workers and 0.6 million of them discouraged workers,
what are the characteristics of the other 0.7 million marginally attached workers?
The other 0.7 million marginally attached workers would like a job but have stopped looking for
work. Because they are not discouraged workers, these 0.7 million workers have stopped looking
for reasons other than their inability to find a job. For example, a stay-at-home spouse might
prefer working in the job market but have quit looking to undertake some home repairs.
16. A high unemployment rate tells us that a large percentage of the labor force is unemployed but
not why the unemployment rate is high. What unemployment measure tells us if (i) people are
searching longer than usual to find a job, (ii) more people are economic part-time workers, or
(iii) more unemployed people are job losers?
U-1 measures long-term unemployment of 15 weeks or more. If U-1 exceeds its normal value,
then people are taking longer than usual to find a job. U-6 equals U-5 plus part-time workers who
want full-time jobs as unemployed, so the difference between U-6 and U-5 is the result of part-
time workers who want a full-time job. If this difference is unusually large, then more workers
than normal are working at part-time jobs. U-2 measures unemployment resulting from people
losing their jobs. If U-2 is larger than normal, then more unemployment than normal results from
people losing their jobs.
17. U.S. Job Openings Rise but Hiring Slips
U.S. job openings increased to 5.8 million in April but the number of workers hired decreased
to a bit below 5.1 million.
Source: The Globe and Mail, June 9, 2016
a. Using the information in the news clip, how do you predict the labor force participation rate,
employment-to-population ratio, and unemployment rate changed?
Because job openings increased, the labor force participation rate probably increased as more
discouraged workers rejoined the labor force to search for a job. Even though it was lower than
previously, because 5.1 million workers were hired, it is likely that the employment-to-population
ratio increased. There are two effects on the unemployment rate. First, 5.1 million more workers
were hired but, second, more discouraged workers rejoined the labor force to look for work and

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76 CHAPTER 5

while they search they were now counted as unemployed. Taken together, the unemployment rate
probably fell.
b. If the government slashed unemployment benefits, how would the numbers in the news clip
change? Why?
Slashing unemployment benefits increases the cost of being unemployed and thereby decreases the
unemployment rate as people take less time to search for a new job. The number of job openings
would not be directly affected but the number of workers hired would increase.
18. Why might the unemployment rate underestimate the underutilization of labor resources?
The official unemployment rate underestimates the underutilization of labor resources for two
reasons. First the official unemployment rate completely omits some underutilized labor. In
particular the official unemployment rate omits marginally attached workers, such as discouraged
workers. These workers are not included in the unemployment rate because they are not searching
for a job, though if the labor market was better and jobs more plentiful they would reenter the
labor market. Marginally attached workers are not a major source of mismeasurement because
they are a small subset of people. Second the unemployment rate counts as fully employed
workers who are working part time but who want full time jobs. These workers are underutilized
because they would like to work for more hours than is presently the case. These workers are a
significantly more substantial source of error because they account for a much larger part of the
labor force.
Use the following data to work Problems 19 to 21.
The IMF World Economic Outlook reports the
Region 2015 2016
unemployment rates in the table.
United States 5.3 4.9
19. What do these numbers tell us about the phase Spain 22.1 19.6
of the business cycle in the four countries in Venezuela 7.4 21.2
2016? Singapore 1.9 2.1
The unemployment rates were low in the
United States and very low in Singapore, so it is probably the case that both countries were in an
expansionary period. The unemployment rate in Spain fell, so Spain might be entering an
expansionary period. The unemployment rate in Venezuela rose drastically, so Venezuela was in a
recession.
20. What do these numbers tell us about the relative size of their natural unemployment rates?
These numbers cover only two years, so making inferences about the relative size of the natural
unemployment rates is potentially dangerous. To the extent that these data are representative, the
natural unemployment rate is likely the highest in the Venezuela and Spain and the lowest in
Singapore.
21. Do these numbers tell us anything about the relative size of the labor force participation rates
and employment-to-population ratios?
The numbers tell us nothing about the relative sizes of the labor force participation rates or the
employment-to-population ratios in these three regions.

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MONITORING JOBS AND INFLATION 77

22. Amazon Will Add 100,000 Jobs as Bricks-and-Mortar Stores Turn to Rubble
Amazon says that it will hire 100,000 new employees in the next 18 months. Meanwhile,
Macy’s, J. C. Penney, and other traditional retailers are closing stores and laying off workers.
And the workers that Amazon is hiring aren’t the ones being laid off by Macy’s and J. C.
Penney.
Source: The New York Times, January 13, 2017
Why will the decisions reported in the news clip increase unemployment and what type of
unemployment will increase?
The decisions reported in the news clip probably increase unemployment because the traditional
retailers likely will lay off more than 100,000 workers. Since retailers are not laying off these
workers due to recession, the unemployment is not cyclical. Frictional unemployment will
increase and to the extent that the laid off workers do not have the necessary skills for a job at
Amazon or other similar positions, structural unemployment also increases.
23. Retraining
Many people graduate with a bachelor’s degree that doesn’t open jobs doors. Acquiring a skill
provides a way of getting a decent paycheck. But acquiring a skill isn’t a one-time event: It is
an ongoing process. A skill doesn’t last for decades and retraining is required. Government-
funded job training is a promising way to help individual workers, employers and the country
as a whole.
Source: The New York Times, February 26, 2017
a. What is the main type of unemployment that retraining programs seek to avoid? Explain.
Retraining programs attempt to reduce structural unemployment. The education would retrain
workers so that they have the skills that business need for the jobs that are available.
b. How might government funded retraining influence the natural unemployment rate? Explain.
If retraining is successful, it will decrease the natural unemployment rate. Natural unemployment
is comprised of frictional and structural unemployment. By decreasing structural unemployment,
the retraining decreases the natural unemployment rate.
24. A typical family on Sandy Island consumes only juice and cloth. Last year, which was the
base year, the family spent $40 on juice and $25 on cloth. In the base year, juice was $4 a
bottle and cloth was $5 a length. This year, juice is $4 a bottle and cloth is $6 a length.
Calculate
a. The CPI basket.
The CPI basket is 10 bottles of juice and 5 lengths of cloth.
b. The CPI in the current year.
The CPI in the current year is 107.7. To calculate the CPI, divide the value of the CPI basket in
current year prices by the base-year value of the CPI basket and then multiply the resulting
number by100. The value of the CPI basket in current year prices is: ($4  10) + ($6  5) = $70.
The value in base-year prices is $40 + $25 (provided in the question), which equals $65. So the
CPI is ($70/$65)  100 = 107.7.
c. The inflation rate in the current year.
The inflation rate in the current year is 7.7 percent. The inflation rate equals the CPI in the current
year minus the CPI in the base year expressed as a percentage of the base-year CPI. Because the
base-year CPI is 100, the inflation rate is [(107.7 – 100)/ 100] × 100 = 7.7 percent.

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25. Amazon.com agreed to pay its workers $20 an hour in 2016 and $22 an hour in 2017. The
price level for these years was 241 in 2016 and 245 in 2017. Calculate the real wage rate in
each year. What is the real wage increase received by these workers in 2017?
The real wage rate equals the nominal wage rate divided by the price level. In 2016 the real wage
rate was $20/241 × 100, for a real wage rate of $8.30. In 2017 the real wage rate was $22/245 ×
100, for a real wage rate of $8.98. The workers got a real pay raise between 2016 and 2017 of
$0.68.
26. News release
In May 2017, real personal consumption expenditure (PCE) was $11,845 billion and the PCE
deflator was 112.257. In June 2017, real personal consumption expenditure was $11,850
billion and personal consumption expenditure was $13,305 billion.
Source: BEA, July 31, 2017
Calculate personal consumption expenditure in May 2017 and the PCE deflator in June 2017.
Was the percentage increase in real personal consumption expenditure greater or smaller than
that in personal consumption expenditure?
Personal consumption expenditure = (real personal consumption expenditure) × (PCE deflator) ÷
100, so in May 2017 personal consumption expenditure was $11,845 billion × 112.257 ÷ 100 =
$13,297 billion.
PCE deflator = ([personal consumption expenditure] ÷ [real personal consumption expenditure) ×
100, so in June 2017 the PCE deflator = ($13,305 billion ÷ $11,850 billion) × 100 = 112.278.
The percentage increase in real personal consumption expenditure was smaller than the percentage
increase in personal consumption expenditure. Personal consumption expenditure grows because
real personal consumption expenditure grows and/or because the PCE deflator grows. During this
period, both real personal consumption expenditure grew and because the PCE deflator grew so
the percentage increase in (nominal) personal consumption exceeded the percentage increase in
real personal consumption expenditure.
27. Adjusted for Inflation, the Federal Minimum Wage is Worth Less than 50 Years Ago
The federal minimum wage was raised to $7.25 an hour from $6.55 nearly seven years ago.
Despite periodic increases, its buying power hasn’t kept up with inflation. In 1968, the federal
minimum was equivalent to $10.90 in 2015 dollars, nearly $4 higher than today’s rate.
Source: CNBC, July 21, 2016
Given the additional information that in 1968, the federal minimum wage was $1.60 an hour,
by what percentage did the CPI increase between 1968 and 2015?
According to the problem, the minimum wage of $1.60 in 1968 is equivalent to $10.90 in 2015.
This equality means that the real values of the federal minimum wage in 1968 and in 2015 are the
same. If we set 1968 as the base year, then the price level in 1968 is 100, and the real federal
minimum wage in 1968 is equal to the nominal federal minimum wage in 1968, $1.60. So
$1.60/1.00 = $10.90/P2015. Solving the equation for P2015 and multiplying the answer by 100 to get
the index value gives P2015 = 681. The inflation rate is the percentage change in the price levels, so
the inflation rate equals [(681 − 100)/100] × 100, which is 581 percent.
28. After you have studied Economics in the News on pp. 126–127 (534–535 in Economics),
answer the following questions.
a. How many jobs must be created each month to keep pace with a growing population?
About 137,000 jobs per month must be created.

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MONITORING JOBS AND INFLATION 79

b. What normally happens to the unemployment rate when the pace of job creation exceeds the
increase in population?
When the pace of job creation exceeds the increase in population, normally the unemployment
rate falls.
c. Why might the unemployment rate sometimes increase, when the pace of job creation
exceeds the increase in population?
The unemployment rate might increase because the relatively rapid pace of job creation brings
more discouraged workers back into the labor force. Unless they immediately find jobs, these
workers are counted as unemployed, which can increase the unemployment rate.
d. How would you expect the labor force participation rate to respond to job creation in excess
of population growth?
One would expect the labor force participation rate to increase, which is indeed what occurred
between May and June 2017.
e. How would you expect an increase in the growth rate of real GDP to affect jobs and
unemployment?
An increase in the growth rate of real GDP increases the number of jobs and decreases
unemployment.
29. Older American Workers Are Still Struggling to Find Jobs
Employers are creating new jobs but older workers are not getting them. In August 2016,
151,000 new jobs were created. But 2.5 million workers over 55 were either unemployed, in
part time jobs but wanting full time, or had given up on seeking work. That’s a 12 percent
unemployment rate. Age discrimination is illegal but hiring discrimination is hard to prove
and economists at the University of California at Irvine and Tulane University say they have
found evidence of age discrimination in hiring, particularly for older women.
Source: Fortune, September 8, 2016
a. What type of unemployment might older workers be more prone to experience?
Older workers are more likely to experience structural unemployment.
b. Explain how the unemployment rate of older workers is influenced by the business cycle.
Older workers might be more likely to be fired when the economy enters a recession because the
business would rather train its younger workers to prepare for the future. If this takes place, then
the unemployment rate of older workers will rise more than that of other groups when the
economy enters a recession.
c. Why might older unemployed workers become marginally attached or discouraged workers?
The news clip explains that older unemployed workers have a significantly more difficult time
finding a new job than do younger unemployed workers. Older workers have a significantly higher
unemployment rate than younger workers. It would be easy for some older workers to become
discouraged about their job prospects and either quit looking entirely, thereby becoming
marginally attached or discouraged workers.

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