7/24/2022

INFLATION -UNEMPLOYMENT- INGRESSING : MASTER ESSAY



A paper by three New Zealanders that's forthcoming in the Journal of Money, Credit and Banking taps into the results from Gallup World Poll from 2005 to 2019, covering 1.5 million people in 141 nations.

The poll includes questions about how people feel about their lives and their current situations. The researchers correlate how people answered those questions with conditions at the time in each country.

The findings are remarkable. People are nine to 13 times as likely to report sadness or physical pain in the short term when there's been a one-percentage-point increase in the unemployment rate as when there's been a one-percentage-point increase in inflation rate.

Similarly, an increase in unemployment is about six times as potent as an increase in inflation in lowering people's self-assessments when they were asked a longer-term question about how they feel about their lives on a scale of zero to 10.

The beauty of the study is that it's unbiased; the people answering the questions about their feelings had no idea that their answers would one day be used to assess the impact of inflation and unemployment on their lives.

If they had been asked directly how they felt about inflation and unemployment, their answers might have been affected by what they had heard about those phenomena in the news or learned in school.

''That's exactly the power of it,'' one of the authors, Robert MacCuulloch, an economist at University of Auckland Business School, told me. His co-authors are Lina EI-Jahel, also of the University of Auckland Business School, and Hamed Shaflee, a senior adviser to the New Zealand Productivity Commission.

What's worse, higher inflation or higher unemployment ? This question is at the core of the debate over how rapidly the Federal Reserve of America should raise interest rates to cool off the economy and bring inflation down from its 40-years-highs.

If you think higher inflation is worse, then it makes sense to raise rates hard and fast, even at the cost of causing a recession. If you think higher unemployment is worse, then moving cautiously is a better choice.

THE ANSWER is actually pretty straightforward : Higher unemployment is worse than higher inflation if you go by the feelings of real people rather than the theories of economists.

Previous research by Mr. MacCulloch and others found similar results, although not always extreme.  In a 2003 paper, the economist Justin Wolfers, then of Stanford University, found that a percentage-point increase in the unemployment rate caused roughly five-times as much unhappiness as a percentage point increase in inflation.

A 2007 paper by David Blanchflower by Dartmouth College found that across European Union nations, a one percentage point increase in the unemployment rate lowered well-being by at least 1.5 times as much as one-percentage point increase in the inflation rate.

The survey results makes sense.People surely don't like inflation, but its effect on their lives is not as bad you might think. It's not as simple as ''inflation makes everything more expensive!''

If wages manage to go up as much as prices go up, wage earners are left unscathed.

To sum, inflation is pretty bad, but unemployment is far worse.

The Essay Publishing continues in the future. The World Students Society thanks Peter Coy for his opinion.

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