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1. How does the existence of the underemployed and the discouraged workers skew (distort) the meaning of the unemployment data?

Consider an unemployment rate of 4%. This means that of the labor force 4 out of 100 people are actively looking for a job and the other 96 some kind of job. These numbers say nothing about the population outside of the labor force, nor the quantity of work performed by those in the labor force.

Consequently, the 4% does not capture the the part of the non-labor force that would migrate to the labor force if getting a job were easier (discouraged workers), nor does it capture the desire of, for example, a part time worker who wants a full time job (under-employed workers). So, the potential amount of labor that workers might like to sell to businesses is not fully captured in the unemployment rate. It is in this sense that the meaning is skewed.

2. Why does full employment never result in 0% unemployment? While the unemployment rate reaches relatively low levels during expansions, it never falls to 0 percent. In principle, full employment is thought of as occurring when ALL resources (especially labor) are engaged in production, in practice, full employment generally corresponds to an unemployment rate of about 5 percent. This 5 percent unemployment rate, often termed the natural unemployment rate, includes both frictional and structural unemployment.

3. Of the types of unemployment noted, which do you believe is the most difficult to solve? Why? Cyclical unemployment may be the most difficult because firms will lay off or fire some current workers and will be more reluctant to add new workers to their payroll. It may be more difficult to solve because employers will not hire until the economy is doing better, and its not always not easy to correct. 4. What is the real cost of