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 economic misery index was created by the economist Arthur Okun. The original index was initially popularized in the 1970s to measure America’s economic health. It helps derive both higher unemployment rates and inflation worsening the economic and social costs for the country.

• Misery index is calculated as the product of the nation's seasonally adjusted unemployment and yearly inflation rates.
• Arthur Okhan developed the misery index. The original misery index was estimated in the 1970s to estimate America's economic health.
• It is derived that higher unemployment rates and worsening inflation make the country's economic and social costs. The higher the misery index, the country's average citizen will feel the greater misery.
• In 1999, Harvard economist, Robert Barro, changed it by making the Barro misery index.

The misery index has been modified several times in the past. In 1999, the economist of Harvard, Robert Barro, changed it by creating the Barro misery index. The interest rate and the economic growth data were considered instead of the annual inflation rate and the seasonally adjusted unemployment rate to evaluate the post-WWII Presidents.

A 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 results when the seasonally adjusted unemployment and annual inflation rate are added together. It is the yardstick of economic distress. If they are at an inflated rate, both data sets work negatively for the country's average citizen. By adding the unemployment and annual inflation rates, price rise and unemployment rise can be measured.

Let us explore the two:

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 economy.
• The data relating to the economy’s inflation in the U.S. comes from the consumer price index report released monthly by the Bureau of Labor Statistics.
• The Consumer Price Index (CPI) calculates the updated cost of the basket of goods and services concerning the cost of the same basket of goods and services in the previous period showing a change in the price of a broad sample of the goods and services.

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. High inflation means the prices of goods and services in the economy are rising. With the help of the misery index, the country's average citizen's economic performance can be seen.

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 in the said calculation.

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:

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.

How To Calculate

The misery index is calculated by adding the seasonally adjusted rate of unemployment and the annual inflation rate.

The benefits of the misery index include the following:

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 to get the Misery Index.
2. 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.

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

This article is a guide to what is Misery Index. We explain its formula to see how to calculate it through an example, its rules, advantages, and disadvantages. You can learn more about accounting from the following articles: -

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