Unemployment expectations

Abstract

This paper investigates the formation and accuracy of unemployment expectations drawn from surveys of U.S. households from 1962 to 2000. Uncertainty about future job prospects is an important component of precautionary motives, and is associated with lower consumption and higher saving. Unemployment expectations were robustly correlated with future changes in the actual unemployment rate. While adaptive, extrapolative, and error-learning models were not found to be consistent with the data, the rational expectation hypothesis could only garner partial support. Rather than relying on publicly available information sources, private information about unemployment and future economic prospects proved highly significant for the formation of unemployment expectations. A more comprehensive understanding of unemployment expectations must be based consumers’ models of the overall economy, and emphasize forward-looking features of bounded rationality.