Reference no: EM131132201

The informal labor market

You learned in Chapter 2 that informal work at home (e.g., preparing meals, taking care of children) is not counted as part of GDP. Such work also does not constitute employment in labor-market statistics. With these observations in mind, consider two economies, each with 100 people, divided into 25 households, each composed of four people. In each household, one person stays at home and prepares the food, two people work in the nonfood sector, and one person is unemployed. Assume that the workers outside food preparation produce the same actual and measured output in both economies.

In the first economy, EatIn, the 25 food-preparation workers (one per household) cook for their families and do not work outside the home. All meals are prepared and eaten at home. The 25 food-preparation workers in this economy do not seek work in the formal labor market (and when asked, they say they are not looking for work). In the second economy, Eat Out, the 25 food-preparation workers are employed by restaurants. All meals are purchased in restaurants.

a. Calculate measured employment and unemployment and the measured labor force for each economy. Calculate the measured unemployment rate and participation rate for each economy. In which economy is measured GDP higher?

b. Suppose now that EatIn's economy changes. A few restaurants open, and the food preparation workers in 10 households take jobs restaurants. The members of these 10 households now eat all of their meals in restaurants. The food-preparation workers in the remaining 15 households continue to work at home and do not seek jobs in the formal sector. The members of these 15 households continue to eat all of their meals at home. Without calculating the numbers, what will happen to measured employment and unemployment and to the measured labor force, unemployment rate, and participation rate in Eat In? What will happen to measured GDP in Eat In?

c. Suppose that you want to include work at home in GDP and the employment statistics. How would you measure the value of work at home in GDP? How would you alter the definitions of employment, unemployment, and out of the labor force?

d. Given your new definitions in part (c), would the labor market statistics differ for Eat In and Eat Out? Assuming that the food produced by these economies has the same value, would measured GDP in these economies differ? Under your new definitions, would the experiment in part (b) have any effect on the labor market or GDP statistics for Eat In?