The trade-off between unemployment and inflation

Economics

Speaker:David G. Blanchflower , Dartmouth College
Date: Wednesday 9 November 2011
Time: 16:15
Location: STC/D

Further details

Previous literature has found that both unemployment and inflation lower happiness. The macroeconomist Arthur Okun characterised the negative effects of unemployment and inflation by the misery index - the sum of the unemployment and inflation rates. This paper extends the literature by looking at more countries over a longer time period. We find, conventionally, that both higher unemployment and higher inflation lower happiness. We also discover that unemployment depresses well-being more than inflation. We characterise this wellbeing tradeoff between unemployment and inflation using what we describe as the misery ratio. Our estimates with European data imply that a one percentage point increase in the unemployment rate lowers well being by two and a half times as much as a one percentage point increase in the inflation rate.