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What is happiness? An economist thinks he may have the answer

Why The Italians Are Merrier Than The Irish
"Happiness is the sublime moment when you get out of your corsets at night," according to the actress Joyce Grenfell. It only goes to prove that happiness is something very personal and subjective, whose analysis has always been left to poets and philosophers. Nothing to do with economists.

Or is it? In some recent research an economist has investigated whether any economic numbers influence our happiness or sense of well-being, and found answers that ought to be of huge interest to the European leaders meeting in Luxembourg today for the Jobs Summit. For unemployment, as you might expect, makes a big contribution to unhappiness.

Cynics might argue that it is typical of an economist to churn through an enormous amount of computer calculations to prove something that any fool could have told you. However, the research, by Professor Andrew Oswald at Warwick University and others, also sheds fascinating light on how unemployment compares to other economic variables in terms of unhappiness, and therefore how much emphasis governments should be putting on economic goals which are often in conflict. Economic policy is all about making trade-offs and taking painful choices. It is no good knowing that unemployment is a bad thing if you do not know what measures people might or might not accept in order to reduce it.

Professor Oswald points out that economics is a minority interest precisely because nobody believes the budget deficit or the growth in construction orders or whatever is one of the ultimate goals of government. He says: "The stolid greyness of the business pages of our newspapers seems to mirror the fact that economic numbers matter only indirectly."

For those persistent enough to have ploughed this far through the greyness, the professor and his co-authors establish from opinion surveys in the US and Europe that well-being has increased modestly in the US but has not risen uniformly in Europe.

While the Italians have grown happier, Britons have become slightly less content, and the Irish and Belgians much less happy, over the past couple of decades. Well-being has not moved uniformly upwards despite the fact that in all of these countries average income per head has increased.

The economists establish formally that extra GDP - at least in these high-income countries - does not make any more than a slight contribution to happiness. In other words, the measure that all politicians make the totem of their success in economic policy, the growth of GDP, is neither here nor there as far as the well-being of the voters goes.

This result will not come as a surprise to those who have long argued that GDP is not an appropriate indicator or target of economic policy. The New Economics Foundation's alternative index of "sustainable economic welfare" explicitly takes account of negatives such as pollution, depletion of resources and spending on crime. It is lower now than in 1979. The new research goes on to explore what does account for changes in happiness levels if it is not the growth of the economy.

Personal characteristics naturally play a big part. Being well-educated, female, married, young or old but not middle-aged and having few children all contribute to a higher level of happiness.

Having a higher level of income makes a small contribution. But the most important factor by far is having a job. In particular, unemployed people are very unhappy.

Professor Oswald cites a wide range of other research showing the prevalence of suicide among the unemployed. Although the death rate from suicide has declined over time, those without work are 12 times more likely than the employed to attempt it, according to one study.

As well as this qualitative evidence, it is possible to put a measurement on the unhappiness caused by unemployment. In most countries, becoming unemployed has an impact on individuals' well-being equivalent to dropping from the top to the bottom quarter of the income distribution. The conclusion: "Unemployment is a major economic source of human distress."

Well, few people would quarrel with this, and especially not the European leaders strutting their stuff for the cameras in Luxembourg today and tomorrow.

But does it mean that governments should do anything it takes to cut the jobless rate? In particular, should they forget about the current policy orthodoxy and just expand government spending or cut interest rates enough to boost the economy and consequently the number of people with jobs, whatever the consequences?

Many influential voices argue that they should, such as Robert Reich, the former US Labor Secretary. On a recent visit to London he urged central bankers to loosen up on interest rates and let the economy expand at a faster rate, and was particularly critical of the Bundesbank for raising the cost of borrowing at a time when unemployment is at record highs.

The new research indicates, however, that inflation also makes people unhappy, and they are willing to endure a severe recession in order to reduce inflation. The survey evidence since 1975 suggests that, on average, a nine percentage point higher unemployment rate was acceptable in order to lop 10 per cent off inflation and the importance of unemployment and inflation for average happiness is therefore roughly equal.

This is not the same as saying that the happiness cost of unemployment is the same as that of inflation, for the full social cost would include the total individual misery caused by unemployment, which is large. However, the fact remains that lower inflation, other things being equal, means higher well-being. And, in political calculations about the median voter, it ought to have equal weight with unemployment.

The bad news for the politicians at the Jobs Summit is therefore that the one easy solution some economists offer to Europe's unemployment problem is not a viable option. They would have to be very confident that expanding demand would not lead to higher inflation to see it as the answer.

At the same time, if continental political leaders really care about the well-being of their citizens, they will have to accept that the low unemployment Anglo-Saxon economies hold some lessons for them.

It is jobs, and not an abstract concept of social solidarity, that make a big difference to happiness. To deny this boils down to arrogance. They might as well tell their unlucky unemployed to get on their bikes and move to a country that is creating jobs.

"Happiness and Economic Performance", Andrew Oswald; and "The Macroeconomics of Happiness", Rafael Di Tella, Robert MacCulloch and Andrew Oswald. Both working papers from the Centre for Economic Performance, LSE.