Time to Replace the Misery Index with an Anxiety Index?



The current US “misery index” — inflation rate plus unemployment rate —  is 5.06 percent (through last September). That’s the lowest level since April 1956 when the MI was 4.75 percent.

But are Americans as happy and confident as they’ve been since the postwar boom? Even more so than the 1990s? Doubtful. While consumer sentiment has rebounded strongly since Great Recession lows, it’s still below where it was during Bill Clinton’s presidency. And nearly two-thirds of Americans think the country on the wrong track.

Of course there’s plenty of debate about both MI components. Recently Goldman Sachs economists argued that inflation is possibly lower than we think due to sharply falling, “quality adjusted” IT hardware and software prices. (Likewise real economic growth and productivity are higher.) That would suggest the MI, although at a low level, understates our degree of non-misery.

On the other hand, the official jobless rate may overstate the health of the US labor market due to falling labor force participation rates. In a recent Washington Post op-ed, economist Ed Lazear noted that the 5 percent unemployment rate would suggest full employment. But the employment rate — the share of the working-age population with a job — is still far below pre-recession levels. [See above chart.]

Lazear tries to figure out which measure — the unemployment rate or the employment rate — is telling the more accurate story:

To determine whether the measured unemployment or measured employment rate is too low, another indicator that is more directly related to labor market demand conditions can be used. I use the “population hiring rate,” which I create from Bureau of Labor Statistics data. It is defined as the ratio of monthly hires (from the Job Openings and Labor Turnover Survey) to the population over 16 years of age. It is important to use the entire working-age population and not merely those employed to avoid the trap of ignoring those outside the labor force. The hiring-rate peak, annualized, was 34 percent, in November 2006 and its low was 22 percent in June 2009. The current population hiring rate is 28 percent, or about half of the way back to the peak rate.

But we must also recognize that demographics play a role in legitimately reducing the proportion of the population that would be expected to work. Consequently, my analysis uses both the hiring rate and a measure of the proportion of older individuals in the potential workforce to predict unemployment and employment rates. The approach tracks pre-recession employment and unemployment well. Not only does the population hiring rate do a good job in predicting past unemployment and employment rates, but there is a strong logic for thinking that hires measure labor demand. A hire only occurs if an employer finds it profitable to add another worker or to replace an old one.

Using models based on pre-recovery data, it is possible to estimate what unemployment and employment rates would be if we were back in the pre-2009 era but had today’s hiring rate and demographic conditions. Using data from September, the official unemployment rate was 5.1 percent. But to be comparable to the pre-2009 period, the unemployment rate should be thought of as 6.3 percent. Labor demand is simply not strong enough to be consistent with such a low unemployment rate by historical standards.

Analogously, the peak pre-recession employment rate was 63.4 percent. Correcting for hiring and demographics makes September’s rate of 59.2 equivalent to a pre-2009 rate of 61.4 percent, meaning we still have a 2 percentage point deficit when compared with the earlier peak. This amounts to about 4.8 million jobs. Put differently, the number employed has grown almost 13 million jobs since the employment trough in February 2010. But it would have to have grown by 17.5 million to make up for the recession and keep pace with growing population.

So using Lazear’s number and the current inflation rate would give us an MI closer to 6 percent than 7 percent, still quite low on a historical basis. More or less what we saw at the height of the 1990s expansion. But back then, only a third of Americans was dissatisfied with the nation’s direction.

So why are we so much gloomier today? Well, the Great Recession was a great and lasting shock to both incomes and confidence, as was the Great Depression. Wage growth during the Not-So-Great Recovery is only half of what it was during the 1990s, early 2000s expansion.

Finally, maybe anxiety about the impact of globalization and automation on future living standards is also playing a role. Or maybe there is something weird about Americans.

Published in Economics
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  1. AIG Inactive

    While Lazear is a great economist, I don’t think what you’re suggesting is correct or that his points support your suggestions.

    1. You claim that in the 1990s “only a third of Americans were dissatisfied”. That’s not correct. In 1991, according to WSJ poll, 53% said the US was in a state of “decline”. In 2007, 57% said in a state of “decline”. In 2011, 54%….in 2015 was the FIRST TIME in 25 years this number fell to below 50% (at 49%). I.e., Americans have been thinking the country is in a state of “decline” for 25 years now. And whether you like it or not, polls of popular opinion do not suggest increasing “anxiety”, but decreasing (although still always half)
    2. Anxiety is a function of media induced BS. Considering that at least 1/2 of the media is going to say the country is doing baldy, depending on who is charge of government at the time, it’s no wonder majority of people will always think things are going badly.
    3. Every conceivable measure has pointed to the opposite direction, and yet popular sentiment is the opposite. Because people respond to expectations…not reality. If you’re always expecting more, you will always fall short
    4. This is why…populism…is so dangerous. if the Republicans had figured that out, they wouldn’t have the horribly populist bunch of candidates they have today.
    5. AEI, as usual, just pushing populist agenda.
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  2. I Walton Member
    I Walton

    The problem with all of this stuff is they make us do stupid things.  Some thought national income accounts were a bad idea because they’d lead us to do dumb stuff.   They were right.  The Fed’s have little to offer other than good clear laws and national defense.  Macro and monetary policy are beyond our ability so always serve some other interests.

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  3. BastiatJunior Member

    The method of calculating the misery index needs to be changed to reflect all of the people that have left the workforce, and other aspects of reality that it misses.

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  4. BastiatJunior Member

    James Pethokoukis: Finally, maybe anxiety about the impact of globalization and automation on future living standards is also playing a role.

    Automation has been around since the invention of the wheel.  Globalization, or something like it, has been around since caveman tribes started trading rocks with each other.

    The idea that those things are causing our current economic problems is just plain laughable.

    • #4
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