Economix Blog: Inflation Is Miserable. Unemployment Is Worse.

Unemployment makes people unhappy, according to economic research. So does inflation. But here’s the part the economists are paid for: evidence that unemployment makes people more miserable than inflation.

About four times as miserable, according to a new paper.

That’s a big difference with potentially significant implications for central bankers, who have long treated lower inflation as their primary goal.

The paper is based on surveys of Europeans between 1975 and 2012, a stretch of time that includes periods of high inflation and high unemployment. It was presented on Friday by David G. Blanchflower, an economist at Dartmouth College, at a conference held by the Federal Reserve Bank of Boston.

Higher unemployment and higher inflation correlate with lower levels of reported well-being, the research shows. But the impact of unemployment is much larger. A one percentage point increase in unemployment lowers well-being nearly four times as much as an equivalent rise in inflation, the paper says.

A 2003 paper by Justin Wolfers, an economist at the University of Michigan, reached a similar conclusion using survey data from the United States.

Monetary policy sometimes involves direct trade-offs between unemployment and inflation. Driving down the pace of price increases tends to drive up unemployment, while allowing faster inflation can help to stimulate job creation.

It is easy to treat the two measures as equivalent. The economist Arthur Okun coined the term “misery index” in the 1970s for the sum of the inflation rate and the unemployment rate. The Fed’s dual mandate enshrines the same equal weighting.

And in practice, central banks including the Fed treat inflation as much more important — in part because economists argue that suppressing inflation improves the stability of economic growth, thereby limiting unemployment over time.

Professor Blanchflower said central banks had it backward.

“It makes sense for central bankers to target unemployment, given that unemployment hurts more than inflation does,” he said.

Article source: http://economix.blogs.nytimes.com/2013/04/12/inflation-is-miserable-unemployment-is-worse/?partner=rss&emc=rss