Misery Index: History, Meaning and How It Affects You?

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The misery index is an economic indicator originally created by Arthur Okun, a former Brookings Institution economist and member of the Council of Economic Advisers to U.S. President Lyndon B. Johnson.

The misery index is calculated by simply adding the unemployment rate to the inflation rate. Despite its rather simple calculation, it is useful in determining how the average citizen in a given country is doing, as higher rates of unemployment and inflation are associated with increased socio-economic issues for a country.

Arthur Okun

Okun invented the misery index in the 1970s while working at the Brookings Institution. The misery index is often trotted out during times of economic turmoil and Okun’s invention was certainly timed to perfection in that regard. During the 1970s, the U.S., as well as much of the rest of the world, was suffering from both high inflation and high unemployment, which came to be called “stagflation”.

This was largely caused by OPEC’s rise to power and subsequent oil shipment boycott to the U.S. and other western nations in retaliation for their assistance to Israel during the Yom Kippur War. This situation caused oil prices to skyrocket and economic growth to slow while the stock market crashed.

President Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” 

Although the misery index usually appears in times of economic turmoil, the global economy is doing pretty well at the moment.

The Misery Index in a Healthy Economy

A healthy economy will produce a misery index of between 6-7 percent. The ideal rate of growth is 2-3 percent. To achieve that, employers need to find good workers. They need to see a natural rate of unemployment from 4-5 percent. When the rate is lower than that, companies can’t find enough good workers to maximize production.

As a result, growth will slow.

A healthy economy also requires some inflation. The Federal Reserve aims for a target inflation rate of 2 percent year-over-year. The Fed uses the core inflation rate that removes energy and food prices. Those prices are too volatile, thanks to daily trading by commodities brokers.

A misery index between 6 – 7 percent signals the Goldilocks economy (an economy that is not too hot or cold, in other words, sustains moderate economic growth, and that has low inflation, which allows a market-friendly monetary policy), with healthy levels of inflation and unemployment.

State Comparison  

Leading the pack of high misery indexes is Rivers State, whose inflation rate of 18.01% in Q3 2017 has sent its misery index through the roof (79.37). Other states with high misery index include Jigawa (78.24), Kaduna (76.5) and Kano (68.56).

On the other hand, states such as Taraba (29.59), Osun (35.36) and Ogun (36.94) still maintain low misery indexes.

At 55.90, Nigeria’s misery index is among SSA’s top 10.

The spike in unemployment and underemployment occurred within the same period Nigeria exited recession and recorded a positive GDP growth rate of 1.4% (Q3’17).

This means that Nigeria recorded a jobless growth in Q2 and Q3 of 2017 (the underemployment rate inched to 21.2% in Q3, from 21.1% in Q2, and 19.1% in Q3’16. This means that 34.02 million people were either unemployed or underemployed in the third quarter of 2017).

It is a lagging economic indicator and its movement is a response to economic events or trends that have occurred. Hence the economic growth and pick up in business activities will be felt on the job data in 2018.

Like Nigeria, South Africa also emerged from recession in Q2-17 but unemployment remained high at 27.7% in Q3-17, the highest in 13 years. This further backs the NBS claim that an economic recession is consistent with an increase in unemployment as jobs are lost and new jobs creation is stalled.

Thus, despite a mild recovery in the economy, economic misery has worsened as welfare level deteriorates amid elevated food prices, increased demand for jobs, as well as downsizing in the labor market. More importantly, this reiterates the need to prioritize job creation beyond aggregate GDP growth as a measure of economic welfare and overall improvement in the economy.

Implication

Beyond the numbers, what is of most concern is the trend of Nigeria’s misery index. The index has risen for some time now. If this movement persists, consumers will be hit hard in the following ways:

  • They will face an even deeper dwindling in purchasing power, as their incomes can only buy less of their usual consumption basket.
  • The poor will become poorer in real terms,
  • and the middle class will thin out.

Additionally, climbing misery index implies declining economic activity and reduced consumption. This is because unemployed people are underutilized and rising prices will discourage rational consumers from spending. This can cause or complicate an economic slowdown or contraction. There will also be increased debt, as the FG borrows money to increase social support schemes.

In the end, the citizens will be left with high uncertainty and low morale.

Furthermore, it is believed that consecutive rises in the misery index usually lead to a decline in the favorability ratings of the serving administration, and could result in a re-election loss for the incumbent. This was the case for U.S. President Ford and Jimmy Carter, whose terms saw the misery index reach all-time highs.

 

 

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