On the Record

Comments on David Blanchflower, David Bell, Alberto Montagnoli, and Mirko Moro, “The Effects of Macroeconomic Shocks on Well-being”

Carol Graham

Editor’s Note: Carol Graham spoke at the Boston Fed’s 57th Economic Conference, held April 12-13, on “The Effects of Macroeconomic Shocks on Well-Being” by David Blanchflower, David Bell, Alberto Montagnoli, and Mirko Moro.

For the purposes of full disclosure, I admit to being one of the early outliers that began working on happiness economics and well-being over a decade ago. I am thus continually intrigued by the range of questions that the approach is now being applied to. The latest is in the legal domain, where lawyers are now considering well-being metrics as the basis for contingency valuations – which takes me from intrigue to worry! Perhaps happiness economics has gone too far? In contrast, the question that is the subject of the conference and of the paper by Danny and his co-authors is a natural one for the metrics and the approach, and a good example of the kind of policy question where a new approach can broaden our thinking. Thus my comments reflect my reactions to the substance of the paper, but also an interest in what the approach can contribute to the more general topic.

This is a great paper. It adds new thinking to the standard discussions about macro-economic policy, and at the same time contributes to the literature on well-being in economics. Specifically, it provides a methodological contribution by combining the unemployment rate and the coefficient on individual unemployment together into one measure of the aggregate, societal level costs of unemployment, and adding it to the standard misery index. Most previous work has simply compared the coefficients on the unemployment and inflation rates, holding individual unemployment constant, but has not factored in the relative costs at the individual level into any kind of aggregate assessment. I think this is a very nice innovation.

A central finding of the paper, meanwhile, and also a novel one, is that while most publics in the sample are bothered more by unemployment than by inflation, in a small number of “inflation hawk” countries, where governments and government rhetoric focus much more on inflation (and for the most part unemployment rates are lower), concerns about inflation dominate the well-being effects.

Perhaps not coincidentally, in our work on Latin America in the late 1990’s, a time period when many countries had undertaken serious macroeconomic reforms designed to combat high or hyper levels of inflation, concerns about inflation dominated the well-being effects (our unemployment rate coefficient was insignificant, that on the inflation rate were significant and negative). Public concerns about inflation were heightened due to recent experience in many countries. At the same time, the same countries were characterized by high levels of informal employment, which reduces the relevance of the formal unemployment rate for much of the labor force. In the case of the findings of Danny’s paper, the issue of unemployment is paramount in the public mind in most of the European countries in his sample and time frame, while inflation is an issue (in terms of well-being) only in a small sub-set of better performing economies.

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