The Misery Index

The misery index (sometimes known as the Economic Discomfort Index EDI ) is simply the sum of the inflation rate plus the unemployment rate. The higher the combined score, the worse the economic situation.

The Misery index was developed by economist Arthur Okun.

misery indexWhere Unemployment rate (ut) and the current inflation rate (πt)

  • High unemployment has social costs – the unemployed lose income. It also creates social problems such as higher government borrowing and lack of belief in society.
  • High inflation also has social costs – high inflation creates uncertainty and can reduce the real value of savings.

The Misery index was popularised in a Wall Street Journal Article in 1971 – during a period of rising inflation and unemployment – after the long-period of post-war economic stability.

Mr. Okun constructs a “discomfort factor” for the economy. It is derived by simply lumping together the unemployment rate and the annual rate of change in consumer prices—apples and oranges, surely, but it is those two bitter fruits which feed much of our economic discontent […]. The higher this index, the greater the discomfort—we are less pained by inflation if the job market is jumping, and less sensitive to others’ unemployment if a placid price level is widely enjoyed … (Janseen, 1971)

Importance of the Misery index

Although the Misery Index is a rather blunt and simplistic tool, it has been used to predict social issues, such as crime, poverty, suicide rates and even election results.

Since the original misery index, other economists have sought to develop the misery index by adding other measures of economic data – such as economic growth, interest rates and government debt.

A more dynamic approach has been to look at cyclical unemployment related to the output gap and unanticipated inflation – which imposes higher costs than expected inflation.

Misery index explained

  • In 2019, in the UK, the misery index was relatively low. Unemployment was 3.8%. CPI inflation 1.5%. This gives a combined misery index of 5.3%.
  • In the 1980s, the misery index was much higher. In 1981, we had unemployment of about 10% and inflation of about 4%, giving a misery index of 14%.
  • At the height of the Lawson boom, inflation reached 10%, with unemployment still persistently high at around 6%. Misery index – 16%

UK Misery index

misery-index

Reducing the misery index

A lower misery index requires a reduction in both inflation and unemployment. This can be achieved by supply-side improvements which help increase productivity and reduce both structural unemployment and structural inflation. Or it can be achieved by low inflation growth – which reduces cyclical unemployment without causing inflation.

The Phillips curve suggests there is a trade-off between inflation and unemployment, but this trade-off can change. E.g rising oil prices could cause cost-push inflation, which shift AS to the left causing both inflation and unemployment. This is known as stagflation. Stagflation will cause a marked rise in the misery index.

 

Limitations of the Misery Index

  • Unemployment figures may underestimate levels of ‘hidden unemployment or part-time working. For example, since 2011, unemployment in UK and US has fallen considerably due to more flexible labour markets. Employment has risen, but the jobs created are low-paid and temporary contracts.
  • Very low inflation can be damaging. An inflation rate of 0% may suggest a stagnant economy like Japan in the 1990s but it gives a low misery index.
  • Inflation may be temporary, e.g. due to cost-push factors. This is less damaging than persistent creeping inflation.
  • It depends on wages. If inflation is 4% but wages are rising by 7%, then workers will be quite happy. But, if inflation is 3% and wages are only rising by 1%, then workers will see fall in real wages.
  • The costs of unemployment are arguably greater than inflation – it depends on factors like real interest rates which determine the real value of savings.
  • The rate of change in the level of unemployment and inflation is important. A sharp rise in unemployment indicates a recession, whilst with falling unemployment rate, optimism is likely to return.

Other Misery indexes

In an attempt to broaden the scope of the original Misery index other economists have taken Okun’s original idea and added other economic statistics.

Barro Misery Index (BMI)

In 1999,  Barro developed a misery index based on changes in inflation, economic growth and interest rates. Barro developed this index to measure the relative performance of the economy during presidential terms.

The change in the rate of consumer price inflation (CPI) is the difference between the average for the term and the average of the last year of the previous term. The change in the unemployment rate is the difference between the average value during the term and the value from the last month of the previous term. The change in the interest rate is the change in the long-term government bond yield during the term. The GDP growth rate is the shortfall of the rate during the term from 3.1% per year (the long-term average value). The change in the misery index is the sum of the first four columns. (Barro)

Modified Misery Index

Steve Hanke developed a misery index which was based on

  • Unemployment + inflation rate + lending (interest) rates – minus year-on-year per capita GDP growth.
  • He used this to develop a world misery index.

world_misery_scores_2014Source: Cato.org

Misery index in US

misery-index-usSource: Decomposing the misery index

Another Misery Index – Unemployment + Government Debt
debt

This adds government debt to the misery index.

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1 thought on “The Misery Index”

  1. I have always seen the term usury index associated with the misery index but i couldnt find a clear discription of this term, so what is it? pls inform?

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