The Happiness Trade-Off between Unemployment and Inflation

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.