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Misery Index, Canada, 1980-2014

Misery Index is a simple indicator of the health of the economy. This index, introduced by Arthur Okun, the economic adviser to the late U.S. President Lyndon Johnson, is the sum of unemployment rate and inflation rate (i.e., year-over-year percent change in Consumer Price Index). It’s well known that the worsening of both unemployment and inflation rates can be costly to not only the economy but also to its population. This cost is not entirely in dollars; this could be social, psychological, and personally painful. Ask an  unemployed how he/she feels when managing to feed his/her family? Or, ask an elderly on a fixed income how he/she is coping with the rising cost of living? Research has also shown a strong association between misery index and the crime rate.

In this note, I take the opportunity to look at the misery index during Harper’s administration, 2006-14 (as the calendar year 2015 is not over yet, and I didn’t want to use fluctuating monthly data) compared to previous Liberal and Conservative administrations since 1980. Between 1980 and 2014, Canada had five Prime Ministers (excluding Kim Campbell and John Turner, who held office for a very short tenure): P. Trudeau (1980-84), B. Mulroney (1984-93), J. Chrétien (1993-2003), P. Martin (2003-06), and S. Harper (2006-14). Their respective misery indexes are shown for periods 1980-84, 1985-92, 1993-2002, 2003-05, and 2006-14 – since I am using the annual rates.

During P. Trudeau’s administration, Canada experienced a worsening recession during 1981-82, with the rate of inflation reaching its highest at 12.5% in 1981, the only year when the rate of inflation exceeded the unemployment rate of 7.6%. In 1982, these two rates were almost equal at 11%. By 1984, the rate of inflation dropped to 4.3% but the unemployment rate jumped to 11.3%. Since one or both rates were quite high between 1980 and 1984, the misery index for 1980-84 period averaged to 17.4%.

Under B. Mulroney’s administration, the misery index fell to 13.4% as both the inflation and unemployment rates fell – the former ranged between 1.4% and 5.6% compared to the latter between 7.5% and 11.2%. Indeed, Canada experienced another recession in the beginning of the nineties but that was much milder compared to that of the early eighties; e.g., the rate of inflation peaked at 5.6%. The gap in the rates of unemployment at the peak of these recessions didn’t vary that much compared to the significant gap in rates of inflation. So the misery index fell largely due to the drop in the rate of inflation.

Ever since J. Chrétien’s administration took over in 1993, the annual rate of inflation in Canada has been between 0.1% and 2.9% – in line with the Bank of Canada’s goal to keep inflation rate low to 2% or around. It’s the unemployment rate that has fluctuated between 6.0% and 11.4% between 1993 and 2014. The unemployment rate has been the dominant component of the misery index, averaging to 10.5% for J. Chrétien, 9.5% for P. Martin, and 7.9% for S. Harper. Again, during S. Harper’s administration, Canada experienced its share of the global economic slump between 2007 and 2009. During this slump, Canada’s rate of inflation remained steadied around 2% but the unemployment rate increased from 6.0% in 2007 to 8.3% in 2009. In other words, the latest economic slump was hard on the Canadian labour market.

The good thing is that the misery index has been steadily falling over time, and hopefully, will continue its downward slide for the incoming administration.

A cautionary note for those familiar with this index. I recognize that this index has been defined in many different ways. For example, some economists have used it as a sum of inflation, unemployment, and interest rate minus the year-over-year percent change in per-capita GDP growth. Since the dynamics of the latter two components is highly volatile in nature, especially the multi-faceted interest rate, it could have distorted the historical comparability.

 

See also “https://en.wikipedia.org/w/index.php?title=Misery_index_(economics)&oldid=681602752”