What is the Misery Index?

The misery index is a yardstick of economic distress. It is calculated as the sum of two data sets: the annual inflation rate and the country’s seasonally adjusted unemployment rate. If both these data sets are at an inflated rate, it is undesirable for an average citizen who gets negatively affected.

This misery index was created by the economist Arthur Okun. The original misery index was initially popularized in the 1970s to measure America’s economic health. From the misery index, it is derived that both higher unemployment rates and inflation worsening create the economic and the social costs for the country.

Misery Index Formula

The misery index is calculated by adding the seasonally adjusted rate of unemployment and the annual inflation rate. Thus, the formula to calculate the misery index is as below:

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Seasonally Adjusted Rate of Unemployment 

  • The seasonally adjusted rate of unemployment is the total labor workforce who can work, and at the same time, they are seeking employment actively but can’t find any job.It is measured in terms of percentage. The unemployment rate is adjusted seasonally to remove the seasonal patterns that develop during the hiring and thus give a good perspective of the relative level of employment.The numbers of this unemployment rate are reported monthly by the Bureau of Labor Statistics in the U.S. in their report.While calculating the seasonally adjusted rate of unemployment, those persons who are retired but working and those who have quit their efforts to find a job are excluded.

Annual Inflation Rate

  • The percentage increase in the price of the goods and the services consumed by the buyers is known as the annual inflation rate. It measures the costs of the various things existing in the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more.The data relating to the economy’s inflation in the U.S. comes from the consumer price indexConsumer Price IndexThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more report released monthly by the Bureau of Labor Statistics.The Consumer Price Index (CPI) calculates the updated cost of the basket of the goods and the services concerning the cost of the same basket of the goods and the services in the previous period showing a change in the price of a broad sample of the goods and the services.

Example of the Misery Index

In the U.S., the seasonally adjusted unemployment rate is 8.9% during the current period, and the annual inflation rate is 3.5%. Calculate the misery index for the period.

Calculation:

The misery index is calculated by adding the seasonally adjusted rate of unemployment and the annual inflation rateInflation RateThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by 100.read more.

Advantages

The limitations and drawbacks of the misery index include the following:

  • It is a handy tool that is very simple and easy to calculate. The two data sets – annual inflation rate and seasonally adjusted rate of unemployment of the country are to be gathered and then added up to get the Misery Index.With the help of the misery index, the country’s economic health can be seen, which will be helpful while analyzing the country’s economy.

Limitations/Disadvantages

  • The analysis of the misery index assumes that if the inflation numbers are low, then it is good for the economy, even if the number is too low. It is not good for any economy to have a very low inflation rate in the practical world.If the unemployment rate and inflation rate are considered, equal weighting sometimes could be misleading.

Important Points

  • Okun’s misery index is simply the sum of two data sets: the annual inflation rate and the country’s seasonally adjusted unemployment rate. The higher the index, the greater the misery will be felt by the country’s average citizen.The misery index in the past has been modified several times. Firstly in 1999, the economist of Harvard, Robert Barro, changed it by creating the Barro misery index. The interest rate and the economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more data were considered instead of the annual inflation rate and seasonally adjusted unemployment rate to evaluate the post-WWII Presidents.While calculating the seasonally adjusted rate of unemployment, those persons who are retired but working and those who have quit their efforts to find a job are excluded. So, only those persons who can work and at the same time are also actively seeking employment but can’t find any job are only included for said calculation.

Conclusion

The high unemployment rate means the total labor workforce who can work, and at the same time heightened when they can’t find a job when they are actively seeking employment. The high inflation means the prices of the goods and the services in the economy are rising. With the help of the misery index, the country’s average citizen’s economic performance can be seen.

This article is a guide to what is Misery Index. We discussed the formula to calculate the misery index, its examples, advantages, and disadvantages. You can learn more about accounting from the following articles: –

  • Fisher IndexSublease AccountingDeflation vs DisinflationHyperinflation Definition