Inflation and Unemployment Both Make You Miserable, but Maybe Not Equally

Tweaking the famous ‘Misery Index’ may help it better fit political events

By Josh Zumbrun of The WSJ. Excerpts:

"So just how miserable are Americans right now? 

For nearly 50 years, the go-to place for an answer has been the Misery Index, invented by the late economist Arthur Okun. The formula is simple: add the unemployment rate (3.7% in October) to the inflation rate as measured by the consumer-price index (7.7% in October), which currently comes to 11.4%.

Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath, and for a couple of months in 2020 during the pandemic when joblessness briefly soared during the early lockdowns."

"Yet despite its simplicity, researchers have found many uses for the Misery Index, from predicting crime to presidential approval ratings. 

In a 2001 paper, Andrew Oswald, a professor at the University of Warwick, and co-authors studied surveys covering nearly 300,000 people living in the U.S. and 12 European countries. In the U.S., the question they studied is: “Taken all together, how would you say things are these days—would you say that you are very happy, pretty happy, or not too happy?”

Note that the question doesn’t ask about the economy at all. Yet, the authors found, happiness falls significantly when inflation rises and unemployment climbs. Importantly, though, the two factors didn’t necessarily carry the same weight, as the Misery Index implies.

A 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate."

"A 2014 paper implied the weighting on unemployment should be even higher, estimating one point of unemployment hurt well-being five times as much as a one point increase in inflation."

"In today’s labor force, that amounts to 1.6 million people losing a job. “It’s deeply unsettling to see unemployment rising around them even when they haven’t lost their own job,” he said. 

The traditional Misery Index is higher now than at the time of the 2010 midterms, when unemployment was 9.4% and inflation was 1.2%. Yet Democrats, the party holding the White House on both occasions, suffered far more in 2010, losing 63 seats in the House of Representatives and six in the Senate. Last week, they lost at most eight House seats, a figure that might shrink as the final races are called. They suffered no net loss of Senate seats and may, depending on the outcome of a Dec. 6 runoff in Georgia, gain one.

Using Mr. Oswald’s reformulation, these outcomes make more sense. His index was 20% in 2010 and 15.1% now. That’s still quite high. But by putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.

Steve H. Hanke, a professor of applied economics at Johns Hopkins University, produces an international version of the Misery Index. To the unemployment rate and inflation rate he adds the prime bank lending rate, which captures the cost of credit in an economy, then he subtracts growth rate of inflation-adjusted per capita gross domestic product. (This is a modified version of a variant proposed by the economist Robert Barro.) In Mr. Hanke’s latest index, for 2021, the U.S. is more miserable than 42 countries, but less miserable than 101."