Misery Index

The misery index is a rough measure of economic hardship calculated by adding the unemployment rate to the annual inflation rate. The idea is that both hurt households: unemployment takes away income, while rising prices erode what remaining income can buy. A higher number suggests a more painful economy. Journalists, political campaigns and some economists use it because it is easy to compute and to explain.

The index is credited to the American economist Arthur Okun, who chaired the Council of Economic Advisers under President Lyndon Johnson. It became a political slogan in US elections during the high-inflation 1970s and was later extended by other economists, most prominently Robert Barro and Steve Hanke. It is a descriptive indicator, not an official statistic, and sits alongside measures such as the Phillips curve in discussions of the trade-off between jobs and prices.

Imagine a household that worries about two things: whether someone will lose their job, and whether the weekly shopping bill keeps rising. On a good day, both worries are small. On a bad day, one or both are large. The misery index simply adds the two worries together into one score.

The score is crude. It treats one point of unemployment and one point of inflation as equally painful, and it says nothing about who is affected. But it captures a simple truth: an economy with many people out of work and prices rising fast feels miserable, even before anyone looks at growth figures.

The original version is:

• $\text{MI}$ is the misery index, in percentage points.
• $u$ is the unemployment rate, as a percentage of the labour force.
• $\pi$ is the annual inflation rate, usually measured by the consumer price index.

For example, a country with unemployment of 6% and inflation of 9% has a misery index of $6 + 9 = 15$. If the next year unemployment rises to 7% but inflation falls to 3%, the index drops to 10, suggesting conditions have eased even though more people are out of work.

The index gained attention during the stagflation of the 1970s, when the US and many other economies suffered high inflation and high unemployment at once. Jimmy Carter cited it against President Gerald Ford in the 1976 campaign; Ronald Reagan turned it against Carter in 1980, when the US figure reached about 22. The subsequent monetary tightening by the Federal Reserve under Paul Volcker brought inflation down but pushed unemployment up during the early-1980s recession. During the Great Moderation, misery index readings in advanced economies were low by historical standards, before rising again with unemployment after the 2008 financial crisis and with inflation in 2021 and 2022.

Economists have proposed broader versions to capture more of the economic picture:

• Barro's misery index, developed by Harvard economist Robert Barro, added the level of long-term interest rates and the shortfall of GDP growth from its trend, and was used to compare US presidential terms.
• Hanke's Annual Misery Index, published by Johns Hopkins economist Steve Hanke since the 2010s, ranks well over 100 countries. It adds unemployment, inflation and the bank lending rate, then subtracts the growth of real GDP per person. Since its 2022 edition the unemployment term has been counted twice, to reflect Hanke's view that joblessness causes more distress than inflation.

Hanke's rankings regularly place countries with very high inflation, such as Venezuela, Zimbabwe, Argentina or Lebanon in recent years, at the top of the table.

• Equal weights. Surveys of well-being suggest that a point of unemployment reduces happiness more than a point of inflation, which is why some versions give unemployment greater weight.
• Missing information. The index ignores inequality, wages, poverty, discouraged workers who have stopped looking for jobs, and the size of the informal economy.
• Comparability. Unemployment and inflation are measured differently across countries, so cross-country comparisons need care.
• Deflation. Falling prices lower the index even though deflation can itself signal economic weakness.

The misery index is best treated as a headline summary that prompts further questions, not as a measure of welfare.

• Cato Institute: Hanke's Annual Misery Index