ResearchBPEA | 1973 No. 1
The Welfare Cost of Higher Unemployment
1973, No. 1
THE BASIC PROBLEM OF AGGREGATE economic policy is often posed as “the cruel choice between two evils, unemployment and inflation.” Although informed policy decisions depend on an accurate assessment of the relative social costs of the two evils in the short run and long run, the welfare economics of inflation has received far more attention in economic analysis than the welfare economics of unemployment. Most previous discussions of the latter have been partial and impressionistic catalogues of the economic and psychological effects of unemployment which make no attempt to analyze cyclical unemployment within the conceptual framework of labor supply theory or to provide quantitative estimates of its welfare cost. And yet any policy decision to induce a temporary recession by monetary and fiscal policy in order to moderate inflationary pressure, as in 1968-69, requires a judgment on the social cost of the resulting loss in employment and output.