1. The cyclical rate of unemployment can be negative, which implies that the business cycle sometimes produces too little unemployment. How can there be “too little” unemployment for the health of the economy?

2. The country of Elbonia recently consisted of 20 million people in its adult non-institutionalized population, 8 million people employed, and 2 million unemployed, for an unemployment rate (U-3) of 20% and a labor force participation rate of 50%. Then one million of the unemployed became discouraged about ever being able to find a job and quit looking.

When the one million quit looking for jobs, did the unemployment rate (U-3) in Elbonia rise or fall?

Did the Elbonian labor force participation rate rise or fall?

Did Elbonian U-6 rise, fall, or remain the same?

In the U.S. in 2013 U-3, U-6, and the labor force participation rate all fell. Do you think the labor market in the U.S. in 2013 was improving, or do you have doubts? Explain.

Does consideration of any one of these three statistics tell you all you need to know about the health of the U.S. labor market? Why do you think the media (and economists as well) tend to focus on just one statistic, U-3?