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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

An economy has a labour force of 40 million. Initially 38 million are employed. A downturn then causes 2 million employed workers to lose their jobs, and 1 million of them stop searching and leave the labour force. The other 1 million keep searching. What is the new unemployment rate, to one decimal place?

The new unemployment rate is 7.7%. Employment falls to 36 million and the labour force shrinks to 39 million after 1 million leave. Unemployed are 3 million, being the original 2 million plus the 1 million still searching, so 3 divided by 39 gives 7.7%.

  1. A5.0%
  2. B7.7%Correct
  3. C10.3%
  4. D7.5%
  5. 12.8%

Explanation

Initial unemployed = 2 million. Employed falls to 36 million. Of the 2 million who lost jobs, 1 million leave the labour force, so the labour force becomes 39 million. Unemployed = 2 + 1 = 3 million. Rate = 3/39 = 7.7%. Using 40 million as the base gives 7.5%, which is the wrong base.

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