- The rate of unemployment is a value that represents the proportion of a country’s labor force that is unemployed and actively searching for a job. This rate can be calculated by dividing the number of unemployed individuals in a state by the labor force. It is worth noting that the labor force does not constitute the total population in a country. Instead, it is the number of adults actively looking for employment.
Therefore, the rate of unemployment in Canada’s scenario can be calculated using the formula: Number of unemployed persons/labor force.
Step One: Calculate the number of unemployed persons
Labor force – employed persons (20 million – 18.5 million). The number of unemployed persons, in this case, is 1.5million.
Step Two: Calculate the rate of unemployment
Unemployed persons/labor force (1.5/20) *100
The rate of unemployment in Canada is 7.5%
- The labor force participation rate represents the percentage of a country’s population currently employed or actively seeking job opportunities. Often, the labor force participation rate excludes minors- individuals below the age of 16- and retired persons. The rate can be calculated using the formula: the number of people actively participating in the labor force/number of people in the labor force.
(18.5million/20million) *100= 92.5%
Therefore, the labor force participation in Canada is 92.5%
- Employment rate represents the proportion of individuals that have jobs. This rate can be calculated using the formula: (number of employed persons/total labor force) *100
Therefore, the rate is (18.5million/20million) *100= 92.5%
- The rate of underemployment represents the proportion of labor in a country that is underused either because the job is undertaken on a part-time basis, or it does not fully utilize the worker’s skills. Underemployment can be calculated using the formula: underemployed persons/total labor force.
Therefore, the rate of unemployment that includes underemployment in Canada is: (2million/20million) *100= 20%
- The unemployment rate that includes the discouraged workers in Canada can be calculated using the formula: Number of discouraged workers/total labor force.
In this scenario, the rate is (1million/20million) *100 =5%
Different types of unemployment may occur in an economy. These include cyclical, structural, regional, classical, seasonal, frictional and voluntary unemployment. Frictional unemployment happens when individuals lose their jobs and are actively looking for other job opportunities. Conversely, structural is an involuntary form of unemployment that arises from a mismatch between job requirements and workers’ skill sets. For example, if an economy shifts to technological-driven operations, it may cause structural unemployment as some individuals without skills in technology struggle to find jobs. Similarly, cyclical unemployment is an involuntary form of unemployment, but it mainly arises from economic changes, peak and recession. Most notably, cyclical unemployment occurs when the economy of a country is in recession, forcing the retrenchment of some workers. Among the economic factors that may lead to cyclical unemployment is a decline in consumer demand. If consumer demand in a country declines, firms may experience low sales and revenue. Consequently, the entity may choose to retrench some employees in attempts to cut on operational costs and maintain sustainable margins.
Frictional, structural and cyclical unemployment can be used to calculate the actual rate of unemployment in a country. This rate can be determined using the formula: natural rate + cyclical rate.
Step One: Calculate the Natural Rate
The formula for calculating the natural rate of unemployment is frictional unemployment + structural unemployment. Therefore, the natural unemployment rate is (2% + 3%) 5%.
Step Two: Calculate the actual unemployment rate
The rate is (5% + 2%) 7%.
The above diagram shows the labor market, demand and supply of labor of a particular region. Most notably, the equilibrium wage rate, denoted as E, in the diagram is $14/hr (We). At the equilibrium wage rate, 50,000 people are employed in the labor market, and the demand for labor is equal to the supply. However, due to government regulation, the minimum wage rate is raised to $16/hr (W1), thus increasing the number of people that are willing to take up jobs at the current wage rate to Qb. However, at the current wage rate, which is higher than the initial wage rate, firms are only willing to hire Qa employees to save on operational costs which means that Qa-Qb individuals are unemployed as illustrated in the diagram.
The unemployment rate in the given scenario can be calculated using the formula: Number of unemployed persons/labor force.
Step One: Calculate the number of unemployed persons
Labor force-employed persons (54,000-50,000)= 4,000people
Step Two: Calculate rate of unemployment
(4,000people/54000 people) *100= 7.4%
This case scenario depicts real-wage unemployment. This type of unemployment occurs when the wage rates are set higher than the equilibrium level, which, in turn, increases the rate of labor supply relative to labor demand. As can be seen in the above scenario, the imposition of a higher minimum wage rate by the government leads to an increase in labor supply relative to demand by firms. Consequently, unemployment is experienced because the demand for labor at the current wage rate is lower than the supply.