Decomposing the Okun's misery index: A dynamic approach

What is it about?

The misery index (the unweighted sum of unemployment and infation rates) was probably the frst attempt to develop a single statistic to measure the level of a population’s economic malaise. In this letter, we develop a dynamic approach to decompose the misery index using two basic relations of modern macroeconomics: the expectations-augmented Phillips curve and Okun’s law. Our reformulation of the misery index is closer in spirit to Okun’s idea. However, we are able to ofer an improved version of the index, mainly based on output and unemployment. Specifcally, this new Okun’s index measures the level of economic discomfort as a function of three key factors: (1) the misery index in the previous period; (2) the output gap in growth rate terms; and (3) cyclical unemployment. This dynamic approach difers substantially from the standard one utilised to develop the misery index, and allow us to obtain an index with fve main interesting features: (1) it focuses on output, unemployment and infation; (2) it considers only objective variables; (3) it allows a distinction between short-run and long-run phenomena; (4) it places more importance on output and unemployment rather than infation; and (5) it weights recessions more than expansions

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Why is it important?

The Great Recession has refocused the attention of macroeconomists on the determinants of business cycles, as well as on the consequences of recession on individual and community well-being. Originally proposed by Arthur Okun, the misery index (the unweighted sum of the unemployment and infation rates) was probably the frst attempt to develop a single statistic to measure the level of a population’s “economic malaise”. In this paper, we rewrite the misery index in order to improve its ability to track the state of health of the macroeconomy, without losing the clarity and conciseness of Okun’s original intuition. Specifcally, we develop a new approach in order to decompose the misery index into its main determinants. This “new misery index” focuses especially on unemployment and growth.