Some Evidence
As we recall, the Keynesian diagnosis of unemployment is that it reflects insufficient aggregate demand, so Keynesians tend to prescribe government policies that would stimulate increased aggregate demand. Since the New Classical diagnosis is different, the prescription is also different.
The New Classical prescription would call for measures that would change search behavior. Most New Classicals would support measures to improve the working and efficiency of job markets -- improved information services, for example, that might make it possible for people to look for jobs in other areas of the country without making the investment of moving there. But another widely supported policy, implied by the New Classical diagnosis, would be more politically controversial:
Notice that unemployment insurance (and similar policies to support the income of unemployed people) reduce the opportunity cost of search. As a result, they would lead to more search than would otherwise take place, and perhaps more than is efficient. A subsidy to any kind of economic activity certainly can lead to an inefficient increase in that activity. As some New Classical spokesmen have put it, if you subsidize something, you get more of it -- and that includes unemployment.
According to this theory, a policy which increases the costs or cuts the benefits of job search will reduce unemployment. For example, getting rid of unemployment compensation would increase the costs. Many "New Classical" economists would favor that.
This prescription follows from the New Classical theory of unemployment, if we see excessive unemployment as being a result of subsidy to search. has recently been popular among some prominent non-economists. It seems to be accepted by both major-party presidential candidates in 1996 and some other prominent political opinion makers.
What does the evidence tell us?
Some Evidence
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