Answer to Question #268536 in Microeconomics for Sadie

Question

Suppose that 20,000 of the employed switches to jobs in the underground economy. When interviewed by STATIN, 50% of these switchers report that they are not working and not seeking work, while the other 50% report that they are not working but seeking work. Explain what happens to the official unemployment rate and the “true” unemployment rate. 

Answer 1

Solution:

The official unemployment rate will increase by a huge figure since it does not account for both the 50% who are not working but seeking work and the 50% who are not working but not seeking work in its calculations.

 

The true unemployment rate will increase slightly since it will only account for the 50% of people who are not working but seeking work. It will leave out the discouraged workers who are not seeking employment.