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Economics and Happiness

Economists typically take it for granted that people dislike unemployment
and inflation, but there has been relatively little direct evidence on
these economic evils. Since governments and central banks follow policies
which try help the economy and reduce the economic “bads”,  the questions
of exactly how much people dislike a poorly functioning economy would seem
to be of central interest. It would also seem to be important to determine
what parts of the a poorly functioning economy are particularly harmful.

One possible measure of how well people are doing is called the Misery
Index, which is simply the sum of the inflation rate and the unemployment
rate. On the face of it the Misery Index seems like an arbitrary measure
– why should an increase of 1% in unemployment the same as 1% increase
in inflation? However, some recent research suggests that there may be
more to the Misery Index than meets the eye.

 

Source: Bureau
of Labor Statistics
.

Personal tradeoffs

Would you be just as happy with a lower job security provided you get
a reduction in the rate of inflation? Exactly how much would of an inflation
decrease would be necessary to keep you just as happy as in a world with
higher unemployment?

One way to get at these question is to try to figure out how people’s
general level of “happiness” varies over time in conjunction with the general
macroeconomy. A recent paper, “The Macroeconomics of Happiness” by Rafael
Di Tella, Robert J. MacCulloch, and Andrew J. Oswald does just this.

How do we measure “happiness”?

Economics variable such as GDP, inflation and unemployment are relatively
easy to measure compared with a more subjective feeling of “happiness”.
One thing that we can do is ask people.

Each year there is a survey called the United States General Social
Survey
which asks over 1,000 people the following question:

    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?

In europe, there is the Eurobarometer Survey which asks an equivalent
question to about 10,000 europeans.

 

The next step then is to try to predict how people will report their
happiness based upon the current economic conditions as well as other factors.

Other factors

 

Tables 1 and 2 look at people’s reported happiness in the US pooled
over the 1972-1994 time period (16,668 observations). From Table 1 we see
that women are slightly happier than men, and married people are significantly
happier than divorced people. Table 2. shows that Unemployed people have
on average the lowest reported happiness, and that the rich are happier
than the poor.

 

 Table 1:









































 

 

Sex

Marital Status

Happy?

All

Men

Women

Married

Divorced

Very

33.7

32.0

33.3

39.5

19.7

Pretty

55.8

56.3

55.3

52.5

61.8

Not too

11.5

11.7

11.4

8.0

18.5

 
Table 2:







































 

 

Poor <—-   Income   —-> Rich

Happy?

Unemployed

Lowest Quartile

2nd Quartile

3rd Quartile

Highest Quartile

Very 

17.8

24.0

29.5

34.8

40.8

Pretty 

52.7

56.04

58.0

56.2

53.1

Not too

29.6

19.9

12.5

9.0

6.1

 
 Inflation and Unemployment

Now, once we control for these other factors that obviously affect happiness,
do macroeconomic conditions matter at all? The results of the paper, after
taking pains to do the statistics right, show that the unemployment
rate and inflation rate do have a significant negative impact on happiness
.

In addition the measured impact is about the same for the two
rates.

Thus, since the two have the same effect, the “welfare function” that
describes the people’s well-being is approximately a function of the Misery
Index (inflation + unemployment). Perhaps the index is not just an arbitrary
measure after all.

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