Chapter 17, Problem 1P

To determine

To explain:

If military is included as a part of the labor force, then explain:

1. The effect it would have on the actual unemployment rate
2. The changes it would have on the estimation of the natural rate of unemployment
3. The computational change that will affect the logic of the short-run Phillips curve analysis and its implications for policymakers. The reason for the government’s wish to make such a change

Concept introduction:

Natural Rate of Unemployment: The natural rate of unemployment is the rate of unemployment that corresponds to potential GDP or, equivalently, long-run aggregate supply. In other words, the natural rate of unemployment exists when the economy is in neither a boom nor a recession.

The six classifications of unemployment that the Bureau of Labour Statistics uses:

U1 is the percentage of labour force unemployed for 15 weeks or longer.

U2 is the percentage of labour force that lost jobs or completed temporary work.

U3 is the official unemployment rate as per the International Labour Organization definition. It is the percentage of labour force that is without jobs and has actively looked for work within the past four weeks.

U4 is U3 + “discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.

U5 is U4 + other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work but have not looked for work recently.

U6 is U5 + the part-time workers who want to work full-time, but cannot do so due to economic reasons, i.e. the economy is bad, so their employer cut their hours and they can’t find other work.

Phillips Curve Analysis: The Phillips curve is an economic concept developed by A. W. Phillips that shows the existence of a stable and inverse relationship between inflation and unemployment. According to the theory, with economic growth comes inflation, which, in turn, leads to more jobs and less unemployment. This is a short-run analysis.