Economic Growth, Unemployment and Inflation: Question 8

Worked solution

Part (a): Unemployment rate before and during the recession

Number unemployed before the recession: $5{,}000{,}000 - 4{,}850{,}000 = 150{,}000$

Unemployment rate before the recession: $\frac{150{,}000}{5{,}000{,}000}\times100 = 3\%$

Number unemployed one year later: $5{,}000{,}000 - 4{,}700{,}000 = 300{,}000$

Unemployment rate one year later: $\frac{300{,}000}{5{,}000{,}000}\times100 = 6\%$

Solvane’s unemployment rate rose from $\boxed{3\%}$ to $\boxed{6\%}$.

Part (b): Identifying the type of unemployment

This is cyclical unemployment.

• The cause is a fall in total spending across the whole economy during a recession, not a permanent decline confined to one industry (which would be structural) and not a regular pattern tied to the time of year (which would be seasonal).
• It affects many different industries at the same time, which is the defining feature of cyclical unemployment: as total demand for goods and services falls economy-wide, firms across many industries cut back production and lay off workers together.

Part (c): Consequences for workers who lose their jobs

• Fall in income: workers who lose their jobs no longer receive a wage, and any unemployment benefit they receive is usually lower than their previous earnings, reducing their spending power and living standards.
• Erosion of skills / harder to find work: the longer a worker remains unemployed, the more their skills and work experience can become outdated, making it more difficult to find a new job and potentially reducing their future earning power once they do return to work.

Final answers

• (a) Unemployment rate rose from 3% (before) to 6% (one year later).
• (b) Cyclical unemployment, caused by a fall in total spending affecting many industries at once.
• (c) Fall in income (reduced spending power/living standards) and erosion of skills (making it harder to find future work), for workers who lose their jobs.