FEEDBACK: To determine the health of an economy, we can compare the actual rate of unemployment with the natural rate of unemployment. The natural rate is the typical rate of unemployment in a healthy, growing economy. Therefore, if actual unemployment equals the natural rate, the economy is healthy. If the actual rate of unemployment is lower than the natural rate, the economy is expanding past its long-run potential—eventually, unemployment will increase to the natural rate. If the actual rate of unemployment is higher than the natural rate, the economy is in a recession.

FEEDBACK: Creative destruction occurs when the introduction of new products and technologies leads to the end of other industries and jobs. As some jobs become obsolete, the result is structural unemployment, which is caused by changes in the industrial makeup (structure) of the economy. Although structural unemployment can cause transitional problems, it is often a sign of a healthy, growing economy.

FEEDBACK: Cyclical unemployment occurs during recessions, when actual unemployment is higher than the natural rate. During temporary expansions, with unemployment below the natural rate, cyclical unemployment is negative. If the actual unemployment rate is higher than the natural rate, cyclical unemployment must be positive. If actual unemployment is below the natural rate, cyclical unemployment must be negative. If the rates are the same, cyclical unemployment is zero.

FEEDBACK: This is possible if some of the people who were employed or unemployed leave the labor force. Consider a simple economy with a labor force of 100 people, where 10 are unemployed and 90 are employed. Suppose 5 of the people who were employed lose their jobs and become unemployed, and the 10 previously unemployed workers get tired of looking for work and leave the labor force. Then, the final number in the labor force is 90, and 85 are employed and 5 are unemployed. Before the transition, we had an unemployment rate of 10%, and afterward the unemployment rate is 5.5%.

FEEDBACK: The steel and coal industry closed down in Allentown, causing workers to seek new employment. They don’t necessarily have the skills to match new jobs, meaning this represents structural unemployment. The song “Allentown” expresses how difficult it is for small communities when people have to adjust to changes in the structure of an economy. The focus of the song is on structural unemployment, which arises from factories closing in the town. Because the whole town was dependent on the factories, which were the biggest employers, after they closed, there were far fewer job opportunities for people in the community. Thus, Billy Joel sings about needing to find a new place to live. Structural unemployment may be a sign of a growing and dynamic economy, but it causes real pain for people who are caught in the middle of a dying industry.

FEEDBACK: The labor force participation rate is calculated by dividing the total number of people in the labor force by the total population, and multiplying by 100 to obtain a percentage figure. Using the data provided in the table, the labor force participation rate = (36,000 / 40,000) × 100 = 90%.

FEEDBACK:The formula for the unemployment rate:

To calculate the unemployment rate before workers become discouraged, begin by calculating the number of employed workers. Looking at the table, we see that the number employed is equal to part-time workers plus full-time workers = 27 + 113 = 140. The question tells you that 14 million people are looking for work. They will be counted as unemployed until they become discouraged workers. Therefore, the previous labor force = 140 + 14 = 154, and the unemployment rate before workers become discouraged = (14 ÷ 154) x 100 = 9.1%.

To calculate the current unemployment rate, begin by considering the 4 million people who become discouraged, stop looking for jobs, and drop out of the labor force. When we account for the discouraged workers, the number of unemployed = 14 million – 4 million = 10 million. The new labor force = 140 + 10 = 150. Therefore, the new unemployment rate = (10 ÷ 150) x 100 = 6.7%. Thus we can see that the unemployment rate decreases to 6.7%.

FEEDBACK: The answer that best exemplifies the change from agriculture to service accounts for creative destruction—the introduction of new products and technologies that lead to the end of other industries and jobs. Changes in the production process allow farmers to produce much more food with far fewer workers.

FEEDBACK: To be considered unemployed, a person must be part of the labor force and searching for a job without success. The pet-sitter is looking but no one will hire her.

FEEDBACK: Frictional unemployment occurs because of delays in matching workers to jobs. Delays happen because of a lack of information or because of government policies. Frictional unemployment also occurs when workers wait to find better opportunities. The worker in the textile factory is an example of structural unemployment because the job loss was due to changes in technology.

FEEDBACK: Someone who changes jobs to be closer to their family would be considered frictional, because they would be in between jobs. The coal miners are structural due to changes in how the industry is run. The ski resort workers fall under seasonal. The landscapers are an example of cyclical because their unemployment is a result of a significant reduction in spending in the economy.

FEEDBACK: There are three different types of unemployment, but only two are considered part of the natural rate—structural and frictional. Cyclical unemployment occurs when an economy is in recession, and is therefore not counted as part of the natural rate.