What Causes Changes in the Unemployment Rate? Job Openings versus Labor Force Participation.

The activity is meant for a Principles of Macroeconomics courses.

Students would have completed study of central macroeconomic variables (GDP, Unemployment, Price Level).

No class size limitations.

The activity (as well as follow-up discussions) can be completed within one 50 minute class period.

Overview

The activity is designed to make clear to students that the unemployment rate could fall if the previously unemployed find jobs but also if the previously unemployed stop looking for work and drop out of the labor force (due to pessimism about the prevailing employment situation).

Students will be given a hypothetical situation that will require them to engage in logical reasoning about different possible causes of unemployment (that is, change in job openings vs. change in labor force participation) in terms of the definition of the unemployment rate.

Expected Student Learning Outcomes

Students will understand the definition of "unemployment rate"

Students will learn to seek more detailed information/data about job openings and labor force participation rates before drawing conclusions about the state of the economy, based on the unemployment rate

Students will learn the importance of paying attention to details on policy issues rather than focusing just on "headline numbers".

Information Given to Students

Consider the following hypothetical situation: A friend comes to you (since you are studying economics) confused and asks you how two politicians could have opposite interpretations of the same data. One politician points to a falling unemployment rate as a sign of an improving economy while an opposition politician claims that the economic situation is actually deteriorating. Which of the following is the best answer to your friend?

A) The unemployment dropped - which means a smaller percentage of the labor force is unemployed and so that is obviously a sign of an improving economy.

B) The unemployment rate dropped - but this could be due to people dropping out of the labor force (giving up on looking for work) which could be a sign of a deteriorating economy because people are unable to find work.

C) We need to know how many people were unemployed and how many were in the labor force (for each given unemployment rate) before we can draw any conclusions about the state of the economy.

D) We cannot make any inferences about the state of the economy based on changes in the unemployment rate.

Students would already have studied the definition of the unemployment rate.

Students should be given 5 or 10 minutes to think about the question individually. And then they could be divided into groups of students to discuss their ideas for another 15 -20 minutes.

Each group can then be asked to (simultaneously) present their best choice, after which the entire class can engage in deliberating and thinking about each possible answer.

The instructor can guide the discussion and eventually help students see the possible merits of each answer.

Finally, students may be given news articles (such as the one given below) to illustrate the practical implications of exchange rate fluctuations.

Instructors need to emphasize that the definition hinges on what it means to be in the labor force and what it means to be unemployed (actively searching for work)

As a follow up, the instructor could ask teams to come up with examples that show the various possibilities leading to change in the unemployment rate.

Students should be asked to read through the news article listed below as a homework assignment following the activity.

When discussing the merits of each possible answer, the following points could be made:

A) This answer could possibly be correct if the previously unemployed have now found jobs, but could be incorrect if the previously unemployed have simply stopped searching

B) This could be correct if many of the unemployed have simply stopped searching and are no longer counted as unemployed or part of the labor force.

C) This is obviously correct since knowing the actual numbers of people unemployed as well as the number of people in the labor force, will help determine whether "A" or "B" above is the "right" answer in this situation.

D) This answer could be partly correct. The unemployment situation is often correlated with the state of the economy and is a strong indicator of whether an economy is doing well or not. But obviously this is only one of several variables that should be considered in evaluating the economic situation. Other important variables such as the inflation rate, rate of change of Real GDP, labor force participation rate, etc. should be evaluated before coming to a conclusion about the state of the economy.

A short answer question:

* An economy has 100 people in the labor force and 10 of those people are unemployed (that is, looking for work). Calculate the unemployment rate.

* 2 of the previously unemployed have found work. What is the new unemployment rate?

* If the 2 people above had stopped looking for work, what would the unemployment rate have been?

* What conclusion can you draw from your answers above?

The following news story can be assigned after class to illustrate the above concepts and ideas:

"Unemployment is Low but That's Only Part of the Story" - by Louis Uchitelle (NY Times, July 11, 2019):

https://www.nytimes.com/2019/07/11/business/low-unemployment-not-seeking-work.html

"How the Government Measures Unemployment" - The Bureau of Labor Statistics (BLS) website:

https://www.bls.gov/cps/cps_htgm.htm