Suppose that the natural rate of unemployment is 4.8 percent for adult males, 4.5 percent for adult females, and 13.4 percent for teenagers. Fifty-five percent of the labor force consists of adult males, 30 percent is made up of adult females, and the rest consists of teenagers.
(a) What is the natural rate of unemployment for the entire labor force?
(b) Suppose that the portion of the labor force that consists of adult females rises from 30 to 40 percent, but the adult male and the teenage portions decrease to 50 and 10 percent, respectively. What is the new natural rate of unemployment for the entire labor force and why has it changed?
(c) Suppose that government policies, a reduction in discrimination, the development of Internet employment services, as well as other factors reduce the natural unemployment rates for adult males, adult females, and teenagers to 4.3 percent, 4.0 percent, and 12.5 percent, respectively. What is the new natural rate of unemployment for the entire labor force?
(d) Monetary authorities monitor labor market conditions in making policy decisions concerning interest rates and the money supply. What do your answers to parts b and c suggest concerning the data monetary authorities are likely to monitor in conducting monetary policy? How might the Fed have acted differently in the 1990s if it did not have some indication that the natural rate of unemployment was declining over the course of that decade?