The Misery Index is a term which is gaining popularity in the press as economic problems and social unrest increase in 2011.
What is The Misery Index?
The misery index is a composite measure made up of two important measures of economic activity:
- The unemployment rate
- The inflation rate
The misery index was created by economist Arthur Okun in the 1970s. Harvard economist Robert Barro created the Barro Misery Index also in the 1970s which also included GDP and the bank rate.
When I first studied economics in the mid-seventies, it was thought that there was a trade-off between unemployment and inflation. As one increased, the other was supposed to reduce according to the Phillips curve suggesting a fairly constant misery index.
While it was a nice theory connected to supply and demand
- if demand exceeded supply, then prices would increase but unemployment should reduce as the incentives to increase supply improved; and
- if supply exceeded demand, then prices would fall but unemployment would increase as actions were taken to reduce supply
a look at the economic data showed that the link wasn’t strong and the misery index raises and falls.
The Misery Index Across The World
MoneyWeek magazine (28 October) reported the misery index across the world’s leading nations.
The Countries With the Lowest Misery Index
- Switzerland 3.50
- Japan 4.80
- Norway 4.90
- Mexico 8.37
- Australia 8.80
The Countries With The Highest Misery Index
- South Africa 28.90
- Spain 23.99
- Greece 19.23
- India 18.39
- Argentina 17.20
The UK has a rating of 13.30 and the United States 13.00.
The Impact Of The Misery Index On Business
The misery index affects confidence. As it increases, consumers and businesses as investors become less confident about the future, increasing the likelihood of delaying spending decisions and increasing saving. As people become less confident of the general economy, the natural inclination is to put about some rainy day money although doing it may become harder because incomes are squeezed.
Different parts of the economy are affected in different ways by increases in the misery index.
As the unemployment element increases, people who are unemployed find it more difficult to get a job and those in employment fear that they may lose their jobs. This aspect of the misery index won’t affect those who are already retired.
As inflation increases, consumers incomes will buy fewer goods and services unless their incomes rise in line or faster than inflation. If unemployment is high, bargaining power of employees to protect their standard of living is weak meaning those in work are likely to have their incomes squeezed and be forced to either cut back on consumption or to increase their personal debt to maintain lifestyles. Increasing debt when unemployment risks are high is risky.
Those retired may be protected against inflation if their pension plans are linked to an inflation index although there will be discrepancies between the index and pensioners’ own purchases. Many pensioners may have a fixed income without any link to inflation and even worse, those without annuities who rely on investment income are squeezed by the record low interest rates.
The misery index creates a feeling of helplessness. Consumers want and need more income to keep up with inflation but unemployment keeps the wage pressures suppressed and there are few opportunities to supplement income with overtime and secondary part-time jobs. Individuals who can afford to save are likely to build up a “worst case” reserve but while this makes sense for the individual consumer, it further weakens confidence in the economy as the reduced consumption causes businesses to cutback further on employment.
The Misery Index and Business Strategy
Both unemployment and inflation should be considered in the PEST Analysis. I believe the misery index is worth adding in as an extra measure to monitor since the statistic related to confidence.
Wikipedia has an interesting analysis of the misery index across the presidents in the USA. It shows how troubled the seventies were with Nixon, Ford and Carter. To some extent, there is a time lag between the actions which cause inflation and unemployment and it showing through in measurements. For example, unemployment is a lagging indicator of recessions.