Critical Thinking Questions


Using the definition of the unemployment rate, is an increase in the unemployment rate necessarily a bad thing for a nation?


Is a decrease in the unemployment rate necessarily a good thing for a nation? Explain.


If many workers become discouraged from looking for jobs, explain how the number of jobs could decline but the unemployment rate could fall at the same time.


Would you expect hidden unemployment to be higher, lower, or about the same when the unemployment rate is high, say 10 percent, versus low, say four percent? Explain.


Is the higher unemployment rate for minority workers necessarily an indication of discrimination? Give other potential reasons.


While unemployment is highly correlated with the level of economic activity, it responds with a lag. In other words, firms do not immediately lay off workers in response to a sales decline. They wait a while before responding. Similarly, firms do not immediately hire workers when sales pick up. What do you think accounts for the lag in response time?


Why do you think that unemployment rates are lower for individuals with more education?


Do you think it is rational for workers to prefer sticky wages to wage cuts, when the consequence of sticky wages is unemployment for some workers? Why or why not? How do the reasons for sticky wages explained in this section apply to your argument?


Under what condition would a decrease in unemployment be bad for the economy?


Under what condition would an increase in the unemployment rate be a positive sign?


As the baby boomer generation retires, the ratio of retirees to workers will increase noticeably. How will this affect the Social Security program? How will this affect the standard of living of the average American?


Unemployment rates have been higher in many European countries in recent decades than in the United States. Is the main reason for this long-term difference more likely to be cyclical unemployment or the natural rate of unemployment? Explain briefly.


Is it desirable to pursue a goal of zero unemployment? Why or why not?


Is it desirable to eliminate natural unemployment? Why or why not? Hint—Think about what our economy would look like today and what assumptions would have to be met to have a zero rate of natural unemployment.


The U.S. unemployment rate increased from 4.6 percent in July 2001 to 5.9 percent by June 2002. Without studying the subject in any detail, would you expect that a change of this kind is more likely due to cyclical unemployment or a change in the natural rate of unemployment? Why?