Instructor Manual: Mankiw, Principles of Economics, 10e, 9780357722718; Chapter 29: Unemployment

PROBLEMS AND APPLICATIONS

1.
a. The adult population consisted of the number of employed (133,320,000)
plus the number of unemployed (23,038,000) plus those not in the labor
force (103,538,000), which equals 259,896,000.
b. The labor force consisted of the number of employed (133,320,000) plus
the number of unemployed (23,038,000), which equals 156,358,000.
c. The labor-force participation rate was the labor force (156,358,000)
divided by the adult population (259,896,000) times 100, which equals
60.2%.
d. The unemployment rate was the number of unemployed (23,038,000)
divided by the labor force (156,358,000) times 100, which equals 14.7%.
2.
a. When Jon finds a job after a long search, the unemployment rate
decreases and there is no effect on the labor-force participation rate
because Jon was and continues to be part of the labor force and the
adult population.
b. When Tyrion graduates and is immediately employed, the
unemployment rate decreases because the labor force increases, and
the labor-force participation rate increases because Tyrion was part of
the adult population and is now part of the labor force.
c. When Arya gives up looking for a job, the unemployment rate decreases
because Arya is no longer considered unemployed and has left the labor
force and the labor-force participation rate decreases.
d. When Daenerys quits her job to be a stay-at-home mom, the
unemployment rate increases because the labor force decreases, and
the labor-force participation rate decreases because Daenerys is still
part of the adult population but is no longer part of the labor force.
e. When Sansa becomes an adult but does not look for work, there is no
effect on the unemployment rate. The labor-force participation rate
decreases because Sansa is now part of the adult population but is not
part of the labor force.
f. When Jaime becomes an adult and begins looking for work, the
unemployment rate increases and the labor-force participation rate
increases because the labor force and the adult population both
increased by one.
g. When Cersei dies while enjoying retirement, there is no effect on the
unemployment rate. The labor-force participation rate increases
because the adult population decreases.
h. When Jorah dies working long hours at the office, the unemployment
rate increases because the labor force decreases, and the labor-force
participation rate decreases because the labor force and the adult
population both decreased by one.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted 16
to a publicly accessible website, in whole or in part.
 Instructor Manual: Mankiw, Principles of Economics, 10e, 9780357722718; Chapter 29: Unemployment

3. Many answers are possible.

4. The fact that employment increased 17.3 million while the unemployed
declined by only 6.3 million is consistent with growth in the labor force. The
labor force constantly increases as the population grows, so the increase in
the number of people employed may exceed the reduction in the number
unemployed.
5.
a. If an auto company goes bankrupt and its workers immediately begin
looking for work, the unemployment rate will rise and the employment-
population ratio will fall.
b. If some of the unemployed auto workers give up looking for a job, the
unemployment rate will fall and the employment-population ratio will
remain the same.
c. If numerous students graduate from college and cannot find work, the
unemployment rate will rise and the employment-population ratio will
remain unchanged.
d. If numerous students graduate from college and immediately begin new
jobs, the unemployment rate will fall and the employment-population
ratio will rise.
e. If a stock market boom induces earlier retirement, the unemployment
rate will rise and the employment-population ratio will fall.
f. Advances in health care that prolong the life of retirees will not affect
the unemployment rate and will lower the employment-population ratio.
6.
a. A construction worker who is laid off because of bad weather is likely to
experience short-term unemployment, because the worker will be back
to work as soon as the weather clears up.
b. A manufacturing worker who loses a job at a plant in an isolated area is
likely to experience long-term unemployment, because there are
probably few other employment opportunities in the area. The worker
may need to move somewhere else to find a suitable job, which means
the worker will be unemployed for some time.
c. A worker in the stagecoach industry who was laid off because of the
growth of railroads is likely to be unemployed for a long time. The
worker will have a lot of trouble finding another job because the entire
stagecoach industry is shrinking. The worker will probably need to gain
additional training or skills to get a job in a different industry.
d. A short-order cook who loses a job when a new restaurant opens is
likely to find another job fairly quickly, perhaps even at the new
restaurant, and thus will probably have only a short spell of
unemployment.
e. An expert welder with little education who loses a job when the
company installs automatic welding machinery is likely to be without a

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted 17
to a publicly accessible website, in whole or in part.
 Instructor Manual: Mankiw, Principles of Economics, 10e, 9780357722718; Chapter 29: Unemployment

job for a long time, because the worker lacks the technological skills to
keep up with the latest equipment. To remain in the welding industry,
the worker may need to go back to school and learn the newest
techniques.

Figure 2

7. Figure 2 shows a diagram of the labor market with a binding minimum wage.
At the initial minimum wage (wM,1), the quantity of labor supplied LS,1 is greater
than the quantity of labor demanded LD,1, and unemployment is equal to LS,1 –
LD,1. An increase in the minimum wage to wM,2 leads to an increase in the
quantity of labor supplied to LS,2 and a decrease in the quantity of labor
demanded to LD,2. As a result, unemployment increases as the minimum wage
rises.
8.
a. Figure 3 illustrates the effects of a union being established in the
manufacturing labor market. In the manufacturing labor market (figure
on the left), the wage rises from the non-union wage, wNU, to the union
wage, wU, and the quantity of labor demanded declines from the non-
union quantity of labor, LNU, to the union quantity of labor demanded,
LUD. Because the wage is higher, the quantity supplied of labor increases
to the union quantity of labor supplied LUS, so there are LUS – LUD
unemployed workers in the unionized manufacturing sector.
b. When those workers who become unemployed in the manufacturing
sector seek employment in the service labor market, shown in the figure
on the right, the supply of labor shifts to the right from S1 to S2. The
result is a decline in the wage in the nonunionized service sector from
w1 to w2 and an increase in employment in the nonunionized service
sector from L1 to L2.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted 18
to a publicly accessible website, in whole or in part.
 Instructor Manual: Mankiw, Principles of Economics, 10e, 9780357722718; Chapter 29: Unemployment

Figure 3

9.
a. Wages between the two industries would be equal. If not, new workers
would choose the industry with the higher wage, pushing the wage in
that industry down.
b. If the country begins importing autos, the demand for domestic auto
workers would fall. If the country begins to export aircraft, there would
be an increase in the demand for workers in the aircraft industry.
c. In the short run, wages in the auto industry would fall, while wages in
the aircraft industry would rise. Over time, new workers would move
into the aircraft industry bringing its wage down until wages were equal
across the two industries.
d. If the wage did not adjust to its equilibrium level, there would be a
shortage of workers in the aircraft industry and a surplus of labor
(unemployment) in the auto industry.
10.
a. If a firm was not providing such benefits prior to the legislation, the
curve showing the demand for labor would shift to the left by exactly $4
at each quantity of labor, because the firm would not be willing to pay
as high a wage given the increased cost of the benefits.
b. If employees value the benefit by exactly $4 per hour, they would be
willing to work the same amount for a wage that is $4 less per hour, so
the supply curve of labor shifts to the right by exactly $4.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted 19
to a publicly accessible website, in whole or in part.
 Instructor Manual: Mankiw, Principles of Economics, 10e, 9780357722718; Chapter 29: Unemployment

Figure 4
c. Figure 4 shows the equilibrium in the labor market. Because the
demand and supply curves of labor both shift by $4, the equilibrium
quantity of labor is unchanged and the wage declines by $4. Both
employees and employers are just as well off as before.

d. If the minimum wage prevents the wage from falling to the new
equilibrium level, the result will be increased unemployment, as Figure 5
shows. Initially, the equilibrium quantity of labor is L1 and the
equilibrium wage is w1, which is $3 higher than the minimum wage wm.
After the law is passed, demand falls to D2 and supply rises to S2.
Because of the minimum wage, the quantity of labor demanded (LD2) will
be smaller than the quantity supplied (LS2). Thus, there will be
unemployment equal to LS2 – LD2.

Figure 5

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted 20
to a publicly accessible website, in whole or in part.
 Instructor Manual: Mankiw, Principles of Economics, 10e, 9780357722718; Chapter 29: Unemployment

Figure 6
e. If the workers do not value the mandated benefit at all, the supply
curve of labor does not shift. As a result, the wage rate will decline by
less than $4 and the equilibrium quantity of labor will decline, as shown
in Figure 6. Employers are worse off, because they now pay a greater
total wage plus benefits for fewer workers. Employees are worse off,
because they get a lower wage and fewer are employed.

ADDITIONAL ACTIVITIES AND ASSIGNMENTS

The following are activities and assignments developed by Cengage but not included
in the text, PPTs, or courseware (if courseware exists) – they are for you to use if you
wish.
I. [In-class assignment] Who Is Unemployed?: 5 minutes total. Works in any
class size. Topics include unemployment categories.
A. Purpose: This assignment helps familiarize students with labor-force
statistics.
B. Instructions: Ask the students to classify each of the following
individuals in one of the following categories: employed, unemployed, or
not in the labor force.
1. Steve worked 40 hours last week in an office supply store.
2. Last week, Elizabeth worked 10 hours as a computer
programmer for the National Video Company and attended night
classes at the local college. She would prefer a full-time job.
3. Roger lost his job at the R-gone Manufacturing Company. Since
then he has been trying to find a job at other local factories.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted 21
to a publicly accessible website, in whole or in part.