The Impact of Unemployment Insurance on Job Search

WHETHER OR NOT a long-run tradeoff exists between unemployment and inflation, there seems to be little politically acceptable opportunity, except in the short run, to buy employment at the cost of inflation.Exponents of the Phillips curve find that it is steep, and accelerationists find that the natural unemployment rate is high.Hall recently estimated that a 5.5 percent aggregate unemployment rate is necessary merely to keep inflation from accelerating.'These findings point to a high floor for unemployment, which is resistant to a one-dimensional stabilization policy depending on manipulation of aggregate demand.This realization has led to a search for structural factors that make the economy particularly prone to unemployment and inflation, a search that has uncovered the disturbing charge that the government itself promotes unemployment through the unemployment insurance system.The system is by far the most important support for unemployed workers in America.It Note: This paper was prepared under a grant from the U.S. Department of Labor, Office of Manpower Policy, Evaluation and Research, under the authority of Title I of the Manpower Development and Training Act of 1962.However, the points of view it states do not necessarily represent the official position of the Department of Labor.My sincerest thanks go to Jan Broekhuis who has performed most of the calculations in this paper, many of which go far beyond standard procedures.1. Robert E. Hall, "The Process of Inflation in the Labor Market," Brookings Papers on Economic Activity (2:1974), p. 377.Hereafter, throughout this issue, this publication will be referred to as BPEA, followed by the date