Low unemployment now is leading to societal breakdown, not inflation
Mcgeever 6-21-23 (Jamie Mcgeever, 6-21-2023, Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the U.S. again. "Column: Biden crosses fingers Fed achieves 'soft landing'," Reuters, https://www.reuters.com/business/energy/biden-crosses-fingers-fed-achieves-soft-landing-2023-06-21/, // AP)
What will have a greater impact on consumers' and voters' well-being - unemployment pain or inflation gain?
Some economists say the 'Misery Index', the unemployment rate plus the inflation rate, is a decent proxy for people's happiness and even presidential approval ratings.
A 2019 paper by academics Joseph Macri and Bahram Adrangi found that unemployment and inflation rates "significantly" influence U.S. Presidents' electoral prospects - a 1 percentage point increase in unemployment decreases the probability of a President receiving a positive approval rating by 3pp, and a 1pp increase in inflation decreases the probability of a favorable approval rating by 7pp, it found.
Inflation "appears to have gained saliency for the electorate relative to the unemployment rate", it found.
Andy Schneider, U.S. economist at BNP Paribas, agrees.
"When inflation is high and unemployment is low, inflation impacts everyone's lives. Are people really going to appreciate inflation moving to 5% from 8%? People still see high prices," he said.
But other academic literature suggests rising unemployment is more damaging to people's well-being. Much more.
A 2022 paper by Lina El-Jahel, Robert MacCulloch and Hamed Shafiee analyzed unemployment and inflation rates and drew notably different conclusions from economists who typically place much less weight on the costs of unemployment when analyzing monetary policy.
A one percentage point rise in unemployment is around six times worse than a one point rise in inflation in terms of people's general well-being, and up to 13 times worse in terms of their negative day-to-day feelings, they found.
David Blanchflower, a professor at Dartmouth College and a former Bank of England policymaker, has long estimated that a one point increase in unemployment reduces happiness five times more than a point increase in inflation.
He dismisses the Misery Index, arguing that a reading of 10.0 with 7% unemployment and 3% inflation is significantly worse for people's well-being than 3% unemployment and 7% inflation.
"Higher inflation hurts, but not as much as unemployment. The misery of unemployed people leads to the unhappiness of everybody else," he said.