ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
An economy has a labour force of 20 million. Initially 19 million are employed. A downturn causes 600,000 people to lose their jobs, and 200,000 of them, feeling discouraged, stop looking for work and leave the labour force; the remaining 400,000 keep searching. No one else enters or leaves. What is the new unemployment rate, using the standard measure of unemployed as a share of the labour force?
The unemployment rate is about 7.1%. Employment falls to 18.4 million, the labour force shrinks to 19.8 million as 200,000 discouraged workers drop out, and unemployed are 1.4 million. Dividing 1.4 million by 19.8 million gives 7.07%. Using the original 20 million labour force would be the wrong base.
- A10.0%
- B7.0%
- C7.1%Correct
- D8.0%
Explanation
Initially unemployed are 1 million. After the job losses employed = 18.4 million. Of the 600,000 who lost jobs, 200,000 leave the labour force, so the labour force falls to 19.8 million. Unemployed = 1.0m + 0.4m = 1.4m. Rate = 1.4/19.8 = 7.07%, about 7.1%. Using 20 million as the base would give 7.0%, which is wrong.
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