Inflation, Unemployment, and Happiness: Misery Index Weights in Europe

Abstract: This paper uses micro- and macrolevel data to examine the effects of unemployment and inflation on subjective happiness in Europe. Using data on subjective happiness from the most recent survey waves of the European Social Survey (2004-2018), we find negative coefficients for both unemployment and inflation. However, the marginal effect of unemployment is larger and more robust than that of inflation. In a post-2008 subsample we find that inflation becomes insignificant. Generally, using macrolevel control variables, we find that the significance of inflation weakens or goes away in some cases, whereas the sign and significance of unemployment are largely unchanged, although unemployment becomes insignificant in a subsample of high-income households. On the other hand, we find that the magnitude of the unemployment coefficient increases and becomes statistically more significant for a subsample of the poorest income deciles. Our results indicate that low-income households have a stronger preference for lower unemployment than high-income households. We also try to address possible endogeneity issues by using a weak instrument for inflation, namely landmass.