INFLATION makes us miserable and so does unemployment. But which one is worse? Some of us think inflation is more harmful than unemployment. Others think vice versa. There is an ‘economic discomfort index’, more commonly known as the ‘misery index’, which simply adds the rates of inflation and unemployment to indicate a level of ‘ill-being’ or the reverse of an economy’s ‘well-being’. An assumption implicit in this index is that a one percentage point rise in inflation causes as much discomfort as a one percentage point rise in unemployment. This seems like an innocuous assumption leading to a simple measure of misery.
What is our current level of misery? Before providing a numerical value, I’ll ask another question: do we know the current rate of unemployment in our economy? Unfortunately, we do not know. Unemployment, apparently, is relatively more difficult to measure than inflation. We are inundated with a new numerical value for inflation every weak (in terms of the Sensitive Price Indicator), and monthly values of consumer and wholesale price indices, but seldom with unemployment data. Do we ever demand to know the unemployment rate?
When I write ‘we’ it refers to our nation. Our nation’s preference in demanding economic data is largely a result of the priorities attached to different data sets by our policymakers who have preferred to ‘not know’ about the yearly unemployment situation. Hence the sporadic nature of the Labour Force Survey (LFS). The latest unemployment rate for FY19 at 6.9 per cent is two years old. The FY18 rate was 5.8pc, but the rate available prior to this is three years old (also 5.8pc for FY15). We’ll never know what the official unemployment rates were for FY16 and FY17. These must be extrapolated with statistical artistry.
Do we lack the expertise or resources to conduct the LFS on a quarterly basis? No. We have full expertise. Hats off to the Pakistan Bureau of Statistics that started conducting the LFS on a quarterly basis and produced eight surveys for FY11 and FY13. The sad fact that it did not continue with this exercise speaks volumes not about PBS, but the government of that time which opted not to know about unemployment rates on a quarterly basis. This disdain by the government for unemployment figures is not unique. Every regime has yearly or quarterly holes in the time series of the LFS. Note there are no such holes in inflation reports, thank God.
Does high inflation cause as much stress as unemployment? In fact, the latter is far more dreadful.
What I am writing now should not be misconstrued as advocating the non-production of weekly inflation data. Even if we do not look at inflation data, we all experience inflation through regular shopping. We cannot say this for unemployment, because not all of us experience unemployment. Thank God again for this blessing. Therefore, it is very important to conduct employment surveys.
An employed person can still buy a lot even when inflation is high. A jobless person cannot buy anything unless the family silver is depleted or money borrowed. Does high inflation cause as much stress as unemployment? I think there is no comparison. Unemployment is far more dreadful than inflation. While this may be labelled as a subjective view, scores of surveys in advanced countries based on ‘happiness research’ support this observation. People in those countries think that unemployment is about five times more dreadful than inflation. This means that a one percentage point increase in the unemployment rate causes as much misery as a five percentage point increase in inflation. This inflation-unemployment trade-off varies between two to 10 times in different countries.
Coming back to the simple misery index and ignoring what the happiness research says, let us look at our misery indices. During the 21st century (FY01 to FY21) we were lucky to have unemployment rates for 13 out of 21 years. The misery index averaged at 14.6pc during these years, unemployment at 6pc and inflation at 8.6pc (for those years in which unemployment rates also existed). We were most miserable in FY09 with an index of 26, mainly due to the double-digit inflation of 20.8pc, largely because of the historic rise in international oil and commodity prices. The misery index stood at 13.7 in FY19, the latest year for which the unemployment rate is available. It was at 10.3, its lowest level, in FY15 mainly due to low inflation induced largely by low international oil and commodity prices.
American economist Arthur Okun devised the simple index in the early 1970s. Its level became close to 22 in the US in 1980 during Carter’s presidency. Reagan used it in his campaign to discredit Carter and win the election. Such is the political use of economic indices. We do not have this index and, therefore, the inflation index is used in our economy for this purpose. The current political economic discourse in the media is dominated by inflation and the rupee price of the dollar.
The simple misery index has been modified by other economists like Robert Barro of Harvard and recently by Steve Hanke of Johns Hopkins University. In Hanke’s formulation lending rates are added because higher lending rates cause misery. Growth in real per capita GDP is subtracted as it causes happiness. This formulation helps make a country by country comparison easier. Hanke has calculated this index for 156 countries for 2020 and ranked these countries from the most to the least miserable.
Venezuela ranks first (most miserable) and its neighbour, Guyana ranks 156 (least miserable or most happy). Why was Guyana most happy in 2020? It struck oil in 2019 and as a result, real GDP per capita increased by 25.8pc in 2020. Next to Venezuela in misery are Zimbabwe and Sudan. And next to Guyana in happiness are Taiwan and Qatar. As we are always obsessed with comparisons with India, it may not hurt us to know that India is higher in misery (index 35.8, rank 39) than Pakistan (index 32.5, rank 49.) Bangladesh is better than both India and Pakistan with a misery index of 14 and rank of 129.
The writer is a former deputy governor of the State Bank of Pakistan.
Published in Dawn, November 12th, 2021