Misery Index

What is the Misery Index?

Misery Index is a yardstick of economic distress and is calculated as the sum of two data sets: the annual inflation rate and the seasonally adjusted rate of unemployment of the country. If both these data sets are at an inflated rate, then it is an undesirable situation to an average citizen who gets negatively affected.

This misery index was created by the economist Arthur Okun. Original misery index initially was popularized in the 1970s for measuring the economic health of America. Using 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

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:

Misery index = Seasonally Adjusted Rate of Unemployment + Annual Inflation Rate
Misery-Index

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Misery Index (wallstreetmojo.com)

Seasonally Adjusted Rate of Unemployment 

  • The seasonally adjusted rate of unemployment is the total labor workforce who has the ability to 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 rate of unemployment is adjusted seasonally for the purpose of removing the seasonal patterns which develop during the hiring and thus gives a good perspective of the relative level of the employment.
  • The numbers of this rate of unemployment are reported monthly by the Bureau of Labor Statistics in the US in their report.
  • While calculating the seasonally adjusted rate of unemployment, those persons who are retired but working and those persons who have quit their efforts of finding the job are excluded.

Annual Inflation Rate

Example of the Misery Index

For example in the country US, during the current period, the seasonally adjusted rate of unemployment is 8.9 % and the annual inflation rate is 3.5 %. Calculate the Misery index for the period.

Calculation:

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.

Misery Index Example

Advantages

There are several different advantages of the Misery Index. Some of the advantages are as follows:

  1. 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 simply in order to get the Misery Index.
  2. With the help of the misery index, the economic health of the country can be seen which will be helpful while conducting an analysis of the economy of the country.

Limitations/Disadvantages

The limitations and drawbacks of the Misery Index include the following:

  1. 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. In the practical world is not good for any economy to have a very low inflation rate.
  2. If the unemployment rate and rate of inflation are considered together, equal weighting sometimes could be misleading.

Important Points

  1. Okun’s misery index is simply the sum of two data sets: the annual inflation rate and seasonally adjusted rate of unemployment of the country. The higher is the index; the greater will be the misery will be felt by the average citizen of the country.
  2. The misery index in the past has been several times modified. Firstly in the year 1999 the economist of the Harvard, Robert Barro modified it by creating the Barro misery index, under which the interest rate and the economic growth data were considered instead of the annual inflation rate and seasonally adjusted rate of unemployment to evaluate the post-WWII presidents.
  3. While calculating the seasonally adjusted rate of unemployment, those persons who are retired but working and those persons who have quit their efforts of finding the job are excluded. So only those persons who have the ability to work and at the same time they are also seeking employment actively but can’t find any job are only included for the purpose of said calculation.

Conclusion

When the seasonally adjusted rate of unemployment and annual inflation rate are added together than the resultant is the misery index. This is the yardstick of economic distress. Both of these data sets if are at the inflated rate, works negatively for the average citizen of the country. By adding the rate of unemployment and annual inflation rate the extent of price rise and unemployment rise in the country can be measured.

The high rate of unemployment means the total labor workforce who has the ability to work and at the same time they are seeking employment actively but can’t find any job is high and 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 economic performance of the average citizen of the country can be seen.

Recommended Articles

This has been a guide to what is Misery Index and its Definition. Here we discuss the formula to calculate the misery index along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *