Poverty index – What it is, definition and concept

The misery index is an indicator that tries to measure the level of malaise suffered in an economy. This, based on two main factors, the possibility of access to the labor market and the cost of living.

In other words, the misery index attempts to calculate the degree of discomfort or unhappiness caused by the economic situation. In that sense, it takes into account the level of unemployment and inflation.

The interpretation of this indicator can be summarized as follows: The more difficult it is to find a job and the more the price of goods and services in the economy increases, the greater the discomfort (or the lower the well-being) of the population.

Okun Misery Index

The first misery index was designed by the economist Arthur Okun. The calculation was simple, the sum of the inflation rate and the level of unemployment. Thus, an attempt is made to reflect the loss of purchasing power of citizens.

The higher the index of misery, the greater discomfort individuals will feel. So, suppose we have two economies with the following data for the year 2019:

annual inflation Unemployment misery index
Country A 5% 9% 14%
Country B 6% 7% 13%

As we can see, the misery index is higher in country A than in country B. This, although in the first there is a lower rate of inflation than in the second.

As a curiosity, this index created by Okun gained popularity in the 1970s in the United States. This, in the context of a prolonged stagflation for several years, in the framework of the oil crisis of 1973.

Criticism of the misery index

The misery index has been subject to various criticisms. First, one of its variables, the unemployment rate, is calculated solely based on the population that is actively looking for a job (the economically active population). However, it leaves aside those individuals who, although they are of working age, do not seek to enter the labor market for various reasons (perhaps they have given up after looking for a job for a long time).

Regarding inflation, although it reduces the purchasing power of people, it cannot be said that it is simply bad. An increase in prices is expected if demand increases as a result of economic growth. Likewise, as a counterpart, deflation (the opposite of inflation), can cause a reduction in company income, generating unemployment.

Another point to keep in mind is that expectations are an important variable in the level of well-being or discomfort. That is, the Okun index considers inflation and current unemployment. However, it should also incorporate the forecasts for the following periods, warn some economists.

Variations to the index

The misery index has been perfected. First, Robert Barro did it in 1999. Thus, to the sum of inflation and unemployment, he added interest rates and the difference between current GDP and potential GDP.

Then, in 2011, the economist Steve Hanke proposed a Barro-like calculation of the misery index, adding inflation, unemployment, active interest rates, and subtracting the variation in GDP per capita.

In other words, Hanke includes a variable whose absence had been questioned in the original index: economic growth. If the change in GDP per capita is positive, in Hanke’s formula, the misery index decreases, and vice versa. That is, if there is economic growth, discomfort tends to be reduced.

However, the misery index, in general, is not considered the most accurate indicator to measure the unrest in an economy or country. However, it is a variable to watch.

As a curiosity, the measurements of 2020 based on the Hanke index (the most recent data that we found at the time of writing this article) resulted in the countries with the highest index of misery being Venezuela, Zimbabwe and Sudan (in the position 1, 2 and 3, respectively). Likewise, the countries with the least poverty were Qatar, Taiwan and Guyana (ranked 154, 155 and 156, respectively).

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