Study: Fighting Inflation Rather Than Unemployment Massively Increases Human Misery

The Washington Post flagged a new study today from a Dartmouth professor and co-authors, which found that high unemployment causes much more misery for the average person than high inflation. That’s significant, in a really discouraging way, because American policy over the last few decades — and especially since the Great Recession — has focused overwhelmingly on keeping inflation low.

The research used several different surveys of well-being and self-reported happiness — cross-referenced with other measures to try to control for the inherent subjectivity — done across both the United States and Europe since the 1970s. This sort of research certainly isn’t the end-all measurement of the effects of economic policy, but well-being and happiness research are relatively well-developed now. They’re worth taking seriously “as a complement to standard approaches,” as the authors put it.

At any rate, when they broke down the numbers for periods of high inflation and high unemployment, and how the two interact, the researchers found human beings are hurt far more by unemployment than inflation:

We estimate the unemployment/inflation trade-off as approximately 3.8. That is to say a one percentage point increase in unemployment lowers well-being nearly four times more than an equivalent rise in inflation. Excluding the five main euro area countries that are especially worried about inflation — Germany, Austria, France, Finland and Austria — the elasticity rises to over six times.

A big reason for this, as the Washington Post sums it up, is that unemployment not only effects people who lost their jobs, “it also generates fear among that person’s family, friends and neighbors over their own job security. The unemployed person may also turn to them for financial or other help, further affecting their well-being.” Meanwhile, inflation is a rise in the general level of prices in the economy — which includes labor more than anything else — so it can’t push up the cost of goods and services without also pushing up incomes. In fact, the single biggest cause of inflation is upward pressure put on consumer prices by growing wages. So there’s a largely unavoidable trade-off between controlling inflation and growing the economy.


Unfortunately, over the last few decades, and especially since the 2008 collapse, the United States has done a much better job minimizing inflation then maximizing employment:

We’ve been consistently hitting our two percent inflation target, even though unemployment remains over seven percent, and an inflation level of three or even four percent is perfectly compatible with (perhaps even better for) a robustly growing economy.

There are several reasons for this imbalance. The Federal Reserve — which controls interest rates and the money supply, and is tasked with the dual mandate to control inflation and boost employment — is intertangled with the banking and financial industry, which has much more interest in lowering inflation. Republicans have also brought a lot of pressure to bear on the Fed to fight inflation, with no serious opposing push-back to prioritize employment. Finally, the decades-long drive to stabilize inflation at two percent has arguably gotten the economy into a rut; it’s now more difficult for job growth to rebound from a recession, and the Fed itself is left with fewer tools to help.