The Misery Index (MI), also known as the Economic Discomfort Index, is a macroeconomic gauge originally proposed by Arthur M. Okun. It is defined as the unweighted sum of inflation and unemployment rates. This indicator attempts to synthesize the main factors generating economic malaise and collective discomfort, although it has been criticized for being an oversimplification of the economic problems faced by average citizens. Consequently, researchers have modified this index by incorporating variables associated with informality, interest rates, and economic growth, among others. Despite its simplicity, the MI has been utilized to describe the behavior of numerous social phenomena, such as suicide, the inclination to gamble, and tourism. However, the index has also been criticized for the inherent difficulty of associating its behavior with specific policy actions. This paper presents the main criticisms that this index has received, as well as its main applications and the various modifications it has undergone over time.
The Economic Discomfort Index, better known as the Misery Index (MI), is attributed to former Brookings Institution scholar Arthur M. Okun, who proposed such an indicator in the 1970s when the United States (U.S.) was undergoing high rates of both inflation and unemployment, a situation that was mainly caused by the Organization of the Petroleum Exporting Countries’ (OPEC) boycott of Middle East oil deliveries to the U.S. [
1].
Okun’s index represents an effort to describe the economic situation based solely on two macroeconomic indicators: unemployment and inflation rates [
2]. In fact, by definition, Okun’s Misery Index (OMI) is simply computed by adding together the unemployment
(𝑈) and inflation
(𝜋) rates [
3,
4,
5,
6,
7]. Regardless of its simplicity, OMI probably represents “[…] the first attempt to summarise a range of macroeconomic indicators into a single statistic in order to track the state of health of the macroeconomy during the business cycle” [
3] (p. 2).
Inflation and unemployment are perceived as two of the most palpable costs for any society [
6]. Accordingly, a low OMI value is preferred over a high value as it reflects superior economic performance [
8]. People dislike inflation as it is related to “[…] decreasing living standards, loss of national prestige, political instability, and exploitation” [
9] (p. 4).
Additionally, people typically associate high prices with failed policies on the part of governmental institutions; in particular, inflation is perceived as the result of unsuccessful policies applied by central banks [
9]. Meanwhile, unemployment may cause both pecuniary and non-pecuniary costs. Such “[…] costs arise primarily since employment is not only a source of income, but also a provider of social relationships, identity in society and individual self-esteem” [
10] (p. 1). In this sense, the non-monetary costs inflicted by unemployment on average individuals manifest themselves in the form of well-being reductions—that is, marital instability, high mortality rates, and increased suicide risk, among other factors [
10].
The objective of this paper is to present the main characteristics, applications, and specifications that Okun’s index has had over time. The paper has been organized as follows: In
Section 2, the definition and the main criticisms of Okun’s Index are presented. In
Section 3, the many modifications applied to OMI over time are presented.
Section 4, which considers the different applications that OMI has had, has been divided into three subsections: In
Section 4.1, the political utilization of Okun’s Index is discussed.
Section 4.2 analyzes the literature that has considered OMI to be a type of poverty index.
Section 4.3 examines the interdisciplinary applications of OMI.
Section 5 is divided into two subsections:
Section 5.1 presents estimations of OMI for the countries in the United States–Mexico–Canada Agreement (USMCA);
Section 5.2 discusses the behavior of the so-called Compensated Misery Index. A summary is presented in
Section 6.
This entry is adapted from the peer-reviewed paper 10.3390/encyclopedia6070149
