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The Happiness Trade‐Off between Unemployment and Inflation
Author(s) -
BLANCHFLOWER DAVID G.,
BELL DAVID N.F.,
MONTAGNOLI ALBERTO,
MORO MIRKO
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12154
Subject(s) - misery index , unemployment , inflation (cosmology) , economics , happiness , index (typography) , real interest rate , life satisfaction , percentage point , full employment , point (geometry) , monetary economics , keynesian economics , monetary policy , macroeconomics , psychology , mathematics , social psychology , finance , theoretical physics , world wide web , computer science , psychotherapist , geometry , physics
Unemployment and inflation lower well‐being. The macroeconomist Arthur Okun characterized the negative effects of unemployment and inflation by the misery index— the sum of the unemployment and inflation rates. This paper makes use of a large European data set, covering the period 1975–2013, to estimate happiness equations in which an individual subjective measure of life satisfaction is regressed against unemployment and inflation rate (controlling for personal characteristics, country, and year fixed effects). We find, conventionally, that both higher unemployment and higher inflation lower well‐being. We also discover that unemployment depresses well‐being more than inflation. We characterize this well‐being trade‐off between unemployment and inflation using what we describe as the misery ratio . Our estimates with European data imply that a 1 percentage point increase in the unemployment rate lowers well‐being by more than five times as much as a 1 percentage point increase in the inflation rate.