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Search Unemployment, Inflation Illusion and the Phillips Tradeoff

Published online by Cambridge University Press:  17 August 2016

R.H. Frank
R.H. Frank*
Affiliation:
Cornell University
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Extract

In his presidential address to the American Economic Association in December, 1971 [5], James Tobin speaks of the contention of some economists that employment in excess of the so-called natural rate takes time that would be better spent on search activity :

Why do workers accept such employment ? An answer to this question is a key element in a theory that generally presumes that actual behavior reveals true preferences. The answer given is that workers accept the additional employment only because they are victims of inflation illusion. One form of inflation illusion is over-estimation of the real wages of jobs they now hold, if they are employed, or of jobs they find, if they are unemployed and searching. If they did not underestimate price inflation, employed workers would more often quit to search and unemployed workers would search longer.

The force of this argument seems to me diluted by the fact that price inflation illusion affects equally both sides of the job seeker's equation. He overestimates the real value of an immediate job but he also overestimates the real value of jobs he might wait for.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 42 , Issue 4 , December 1976 , pp. 331 - 336
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1976 

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References

[1] Alchian, A. (1970), «Information Costs, Pricing and Resource Unemployment», in Phelps, , et.al, Microeconomic Foundations of Employment and Inflation Theory, Norton.Google Scholar
[2] Holt, C. (1970), «Job Search, Phillips’ Wage Relation, and Union Influence : Theory and Evidence,» in Phelps, , et.al, Microeconomic Foundations, Norton.Google Scholar
[3] McCall, J.J. (1970), «Economics of Information and Job Search,» QJE, February.Google Scholar
[4] Mortensen, D. (1970), «A Theory of Wage and Employment Dynamics», in Phelps, , et.al., Microeconomic Foundations, Norton.Google Scholar
[5] Tobin, J. (1972), «Inflation and Unemployment,» AER, March.Google Scholar