Comparison of the Effects of Unemployment and Inflation on Happiness

In fact, happiness (utility) may be the ultimate goal of any society and not the level of GDP. The happiness is affected by both unemployment and inflation. The main aim in this paper is to compare the effects of unemployment and inflation on happiness concerning EEC (European Union Countries) and Iran. To do so, we have used panel data regarding the period 2001–2011. In order to be able to compare the effects of unemployment and inflation on happiness we have estimated the model using standard variables. After doing the F test and the test of Hausman the parameters are estimated using the Fixed Panel approach. The results indicate that unemployment and inflation both have negative and significant effects on happiness: if inflation rate and unemployment rate each increases by one standard deviation, happiness will reduce by about 0.044 and 0.181 of standard deviation, respectively. Comparison between the effect of inflation and unemployment on happiness has shown that the effect of unemployment on happiness is considerably more than that of inflation (this is accepted using the Wald test). Moreover, if the GDP per capita increases by one standard deviation, happiness will also increase about 0.140 of the standard deviation. Thus, in order to increase happiness, reduction of unemployment should be the preferred policy.