Which one among the following statements is not correct?

Correct — D, the claim that at full employment the measured unemployment rate is negative. An unemployment rate is the number of unemployed divided by the labour force, so it cannot fall below zero under any conditions. Full employment does not even mean a rate of zero: it is the level of activity at which the only unemployment left is frictional, people between jobs, plus structural, people whose skills or location do not match the vacancies on offer. Economists call that residue the natural rate of unemployment, and it is a positive number — the sense in which an economy is 'fully employed' is that cyclical unemployment has gone, not that everybody is working. The other three statements are all sound descriptions of standard macroeconomics.

• (a)When the economy grows slowly than its potential, the unemployment rate rises. — Correct, and therefore not the answer. This is the substance of Okun's law: output below potential means firms need fewer workers than the labour force supplies, and the gap shows up as rising unemployment.
• (b)Structural employment occurs when jobs are eliminated by changes in demand for particular goods or due to automation. — This is the textbook definition of structural unemployment — a mismatch between the skills or locations workers offer and those employers want, caused by shifts in demand or by technology. The paper prints 'employment' where 'unemployment' is meant, an obvious slip, but the proposition itself is right.
• (c)Recession in the economy leads to cyclical unemployment. — Correct. Cyclical unemployment is by definition the unemployment that rises and falls with the business cycle, and a recession is its cause.

Unemployment is classified by cause, and the classification decides the cure. Frictional unemployment is the short gap while a worker moves between jobs, and it never disappears in a mobile labour market. Structural unemployment comes from a mismatch of skills or geography and yields only to retraining or migration. Cyclical unemployment tracks the business cycle and responds to demand management. Full employment is the state in which cyclical unemployment has been eliminated and only the first two remain.

Because the residue is real, macroeconomics gives it a name and a number: the natural rate of unemployment, or the non-accelerating-inflation rate, the rate consistent with stable inflation. Pushing measured unemployment below it, by stimulating demand, tends to raise inflation rather than deliver lasting jobs. That is the fact option (d) contradicts, and it contradicts it twice over — by implying full employment means zero unemployment, and then by putting the figure below zero. In the Indian statistical system the rate itself is measured by the Periodic Labour Force Survey under three reference periods, usual status over a year, current weekly status over seven days and current daily status over half-day blocks.

• The unemployment rate is unemployed persons as a share of the labour force, so its floor is zero.
• Full employment means cyclical unemployment has gone; frictional and structural unemployment remain.
• That remainder is the natural rate of unemployment, also written as the non-accelerating-inflation rate of unemployment.
• Okun's law links output below potential to a rising unemployment rate.
• India measures unemployment through the Periodic Labour Force Survey on usual, current weekly and current daily status.

• Equating full employment with a zero unemployment rate.
• Treating automation-driven job loss as cyclical rather than structural.
• Letting a printing slip in one option distract from a statement elsewhere that is substantively impossible.

A not-correct item across the whole unemployment taxonomy. Test each statement against a definition rather than against your sense of which sounds odd.

• practice — not a real PYQ

  At full employment, the unemployment that remains in an economy is

  • (a)zero
  • (b)only cyclical
  • (c)frictional and structural
  • (d)only seasonal

  Answer(c) frictional and structural — together they make up the natural rate of unemployment.

• practice — not a real PYQ

  Unemployment caused by a fall in aggregate demand during a downturn is called

  • (a)frictional
  • (b)structural
  • (c)cyclical
  • (d)disguised

  Answer(c) cyclical — it rises and falls with the business cycle.