Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness

By R. Tella, Robert J. MacCulloch, Andrew J. Oswald. 2001

2,014 citations recorded by the source corpus.

Modern macroeconomics textbooks rest upon the assumption of a social welfare function defined on inflation, p, and unemployment, U. However, no formal evidence for the existence of such a function has been presented in the literature. Although an optimal policy rule cannot be chosen unless the parameters of the presumed W(p, U) function are known, that has not prevented its use in a large theoretical literature in macroeconomics. This paper has two aims. The first is to show that citizens care about these two variables. We present evidence that inflation and unemployment belong in a well-being function. The second is to calculate the costs of inflation in terms of unemployment. We measure the relative size of the weights attached to these variables in social well-being. Policy implications emerge. Economists have often puzzled over the costs of inflation. Survey evidence presented in Robert J. Shiller (1997) shows that, when asked how they feel about inflation, individuals report a number of unconventional costs, like exploitation, national prestige, and loss of morale. Skeptics wonder. One textbook concludes: “we shall see that standard characterizations of the policy maker’s objective function put more weight on the costs of inflation than is suggested by our understanding of the effects of inflation; in doing so, they probably reflect political realities and the heavy political costs of high inflation” (Blanchard and Fischer, 1989 pp. 567–68). Since reducing inflation is often costly, in terms of extra unemployment, some observers have argued that the industrial democracies’ concern with nominal price stability is excessive—and have urged different monetary policies. This paper proposes a new approach. It examines how survey respondents’ reports of their well-being vary as levels of unemployment and inflation vary. Because the survey responses are available across time and countries, we are able to quantify how self-reported well-being alters with unemployment and inflation rates. Only a few economists have looked at patterns in subjective happiness and life satisfaction. Richard Easterlin (1974) helped to begin the literature. Later contributions include David Morawetz et al. (1977), Robert H. Frank (1985), Ronald Inglehart (1990), Yew-Kwang Ng (1996), Andrew J. Oswald (1997), and Liliana Winkelmann and Rainer Winkelmann (1998). More recently Ng (1997) discusses the measurability of happiness, and Daniel Kahneman et al. (1997) provide an axiomatic defense of experienced utility, and propose applications to economics. Our paper also borders on work in the psychology literature; see, for example, Edward Diener (1984), William Pavot et al. (1991), and David Myers (1993). Section I describes the main data source and the estimation strategy. This relies on a regressionadjusted measure of well-being in a particular year and country—the level not explained by individual personal characteristics. This residual macroeconomic well-being measure is the paper’s focus. * Di Tella: Harvard Business School, Morgan Hall, Soldiers Field, Boston, MA 02163; MacCulloch: STICERD, London School of Economics, London WC2A 2AE, England; Oswald: Department of Economics, University of Warwick, Coventry CV4 7AL, England. For helpful discussions, we thank George Akerlof, Danny Blanchflower, Andrew Clark, Ben Friedman, Duncan Gallie, Sebastian Galiani, Ed Glaeser, Berndt Hayo, Daniel Kahneman, Guillermo Mondino, Steve Nickell, Julio Rotemberg, Hyun Shin, John Whalley, three referees, and seminar participants at Oxford University, Harvard Business School, and the NBER Behavioral Macro Conference in 1998. The third author is grateful to the Leverhulme Trust and the Economic and Social Research Council for research support. 1 See, for example, Olivier Blanchard and Stanley Fischer (1989), Michael Burda and Charles Wyplosz (1993), and Robert E. Hall and John Taylor (1997). Early influential papers include Robert J. Barro and David Gordon (1983). 2 N. Gregory Mankiw (1997) describes the question “How costly is inflation?” as one of the four major unsolved problems of macroeconomics. 3 A recent contribution to this debate in the United States is Paul Krugman’s piece, “Stable Prices and Fast Growth: Just Say No,” The Economist, August 31, 1996.

Subfields: Accounting, Social Psychology, Sociology and Political Science

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Citations in the corpus

Are People Inequality Averse, and Do They Prefer Redistribution by the State? Evidence from German Longitudinal Data on Life Satisfaction (2007, neutral): “7 Hamermesh (2001) and DiTella et al. (2001) also used ordinary least squares (OLS) to analyze satisfaction scales.”
Dissatisfied with Life, but Having a Good Day: Time-Use and Well-Being of the Unemployed (2010, neutral): “See, for example, Clark and Oswald (1994), Winkelmann and Winkelmann (1998), Di Tella et al. (2001) , Clark (2003), and Blanchflower and Oswald (2004)) for income, Helliwell and Putnam (2005) and Winkelmann (2006) for social contact, and Deaton (2008) and Bockerman and Ilmakunnas (2009) for health.”
Subjective economic well-being in Eastern Europe (2003, neutral): “Whether this implies maximising a welfare function directly, as argued in Di Tella et al. (2001), or raising welfare indirectly by creating appropriate institutions, as suggested by Frey and Stutzer (2000), is a different matter and need not concern us here.”
How Do Voters Respond to Information? Evidence from a Randomized Campaign (2013, neutral): “24Among others, see Di Tella, MacCulloch, and Oswald (2001); Gerber and Lewis (2004).”
How important is methodology for the estimates of the determinants of happiness (2004, background): “A hybrid is the paper by Di Tella et al. (2001).”
Cross-country determinants of life satisfaction: exploring different determinants across groups in society (2006, neutral): “Similarly, a negative impact of inflation and unemployment is reported in DiTella et al. (2001, 2003) .”
Does Marriage Make People Happy, or Do Happy People Get Married? (2006, background): “With the help of a single question or several questions on studied and successfully applied (e.g.,Clark and Oswald, 1994; Di Tella et al., 2001; Easterlin, 2001; Frey and Stutzer, 2000; Kahneman et al., 1997; and for surveys seeFrey and Stutzer, 2002a, 2002bandOswald, 1997).”