SURVEY EVIDENCE ON EXCESSIVE PUBLIC PESSIMISM ABOUT THE FUTURE BEHAVIOR OF UNEMPLOYMENT

Two of the questions in the Surveys of Consumer Attitudes undertaken by the Survey Research Center of the University of Michigan deal with households' expectations about inflation and the change in unemployment. We compare quarterly time series of the mean responses with the actual behavior of inflation and unemployment to see whether households are overly optimistic or pessimistic about the future behavior of inflation and unemployment. We find an asymmetry. Over the 21 years of our analysis, on average the public is neither overly optimistic nor overly pessimistic about future inflation. However, the public has been significantly too pessimistic about the future behavior of unemployment. These results have an important implication for macroeconomic policy. If politicians respond to complaints from the public about inflation and unemployment they will target policy instruments at unemployment to a greater extent than if the public was not so pessimistic about the behavior of unemployment. The result may be a higher rate of inflation than if the public were not mistakenly pessimistic about the behavior of unemployment.