Answer to Question #163374 in Macroeconomics for Leo Maloney

Question

Suppose two countries with the same population each start with 10 unemployed workers and 90 employed workers. Subsequently 5 workers in country A find jobs and become employed, while in country B, all 10 of the unemployed become discouraged and leave the labour force. Because country B’s rate of unemployment falls from 10% to 0%, while country A’s only falls from 10% to 5%, we can say that the labour market outcome in Country B is superior to that in Country A.

Answer 1

The statement is true.

The unemployment rate in country A fell from 10% to 5% when those 5 unemployed persons got jobs. But in country B, the disinterested persons leave the labor force and so in literal terms, country B's unemployment rate falls to 0%. Since discouraged workers are not actively searching for a job, they are considered nonparticipants in the labor market, that is, they are neither counted as unemployed nor included in the labor force.