Getting to know the misery index


What is the misery index?

The misery index is as its name suggests. It refers to how much distress people feel every day regarding unemployment and increased cost of living. Of course, not everybody is financially capable or has some savings to pay for rent and other necessities. People who do not have jobs feel more intense about this issue. But can one measure misery? The misery index tries to measure it by adding unemployment and inflation rate. Unemployment and inflation seem to have a relationship, and they both impact the economic lives of people. If we add these two, we might know about the current health of an economy.

Phillips curve, stagflation, and the misery index

Back then, people based their expectations regarding unemployment and inflation on a theory called the Phillips Curve. It says that the two have a stable and inverse relationship. Hence, if inflation increases, unemployment decreases and vice versa. On the other hand, unemployment increases when inflation declines, and vice versa. People used this theory at least until the 1960s. In the 1970s, people experience stagflation that somehow disproved this theory. There was economic growth stagnation. Inflation was his even when unemployment was high and vice versa. This opposed what the Phillips Curve was trying to say. The stagflation somehow triggered the popularization of the misery index.

Inflation, unemployment, and the misery index

We have kept mentioning inflation and unemployment since earlier because these are the two components of the misery index. Inflation is a rate at how money's buying power decline when consumer prices increase. Unemployment is the number of adults looking for jobs - a fraction of the US's total workforce. These two usually have an inverse relationship, as the Phillips curve tells us.

How did it start?

Arthur Okun is the economist who made the misery index. He first used it by adding unemployment and inflation rate. This sum will give an insight into an economy's current health. The higher the number, the more misery that an average citizen feels. People have different takes on this index. Some say that it is helpful, and some cannot stress enough that it should not be used as a precise measurement for economic health. First, unemployment and inflation both have blind spots. The unemployment rate can only cover those who are active in job hunting. Hence, it does not consider those that gave up. The same is true for inflation. Inflation is not the only thing that indicates stagnant economic growth - zero inflation or even deflation can. This would generate a minimal misery index. We also highlight that the misery index somehow treats both of these components as equal when they are not.

So, should one consider the misery index at all?


economists say that it can be a good indicator

for economic health, while some disagree because it does not consider economic

growth. The misery index can give us an idea about the current financial

health. On the other, it tends to be an imprecise metric because both inflation

and unemployment have inherent blind spots. So, investor or not, you should

always keep contingency or emergency funds in case of economic downturns or job