Question

Matt loses his job and decides to sit on the beach rather than looking for work the next few months. Other things the same, what happens to the unemployment rate and labor-force participation rate?

a. Unemployment rate increases, labor-force participation rate decreases.
b. Unemployment rate decreases, labor-force participation rate decreases.
c. Unemployment rate increases, labor-force participation rate increases.
d. Unemployment rate remains the same, labor-force participation rate decreases.

Answer 1

If Matt loses his job and refrains from job seeking, there would be no impact on the unemployment rate but there would be a decrease in the labor-force participation rate, as he is not actively seeking employment.

Step-by-step explanation:

If Matt loses his job and decides to sit on the beach instead of looking for work over the next few months, the unemployment rate would not be affected because he is not actively seeking employment. However, the labor-force participation rate would decrease because Matt is no longer part of the workforce and is not seeking employment or available to work.

Economists use the labor force participation rate as a measure to understand active engagement in the labor market which includes both people who are working and those who are unemployed but actively looking for work. Since Matt is neither employed nor actively looking for a job, he is counted as out of the labor force, hence decreasing the labor-force participation rate.

Therefore, the correct answer to the question is:
d. Unemployment rate remains the same, labor-force participation rate decreases.