What's Worse, Inflation or Unemployment?

Message for Alan Greenspan: A new study finds that joblessness has far more negative effects than rising prices

Monetarists have long argued that the Federal Reserve's mandate to combat both inflation and unemployment should be revised to focus policy solely on inflation. Judging by a forthcoming study in the journal International Finance, however, such a shift might not sit well with the body politic.

In the study, based on data from some 280 surveys conducted in the U.S. and Europe from 1973 to 1998, political economist Justin Wolfers of Stanford University analyzed how people's views of their overall happiness are affected by present and past levels of inflation and unemployment. He found that a rise in joblessness is substantially more troubling to people than accelerating inflation -- even when the period of unemployment is short-lived.

Wolfers' analysis indicates that a one-percentage-point rise in unemployment causes as much unhappiness as a five-point increase in inflation. Fluctuations in the jobless rate are also unsettling.

In sum, the prospect of declining job security worries folks a lot more than rapidly rising prices. The policy implications for Fed Chairman Alan Greenspan, says Wolfers, are clear: Keep an eye on both inflation and unemployment, but "when the trade-off for achieving greater employment stability is just a little more inflation instability, the gain in the public's happiness suggests it's worth it."

By Gene Koretz in New York