The Effects of age and job protection on the welfare costs of inflation and unemployment: a source of ECB anti-inflation bias?

This paper extends the well known Di Tella et al. (2001 and 2003) analyses on the welfare costs of inflation and unemployment based on self-reported happiness data by looking at age and job market characteristic splits in a sample which includes more recent years and new countries. With both one and two stage estimating procedures we find support for the hypothesis that the relative welfare cost of unemployment versus inflation is higher than one (in contrast with the “equal-to-one” implicit assumption of the Misery Index). We also observe that the relative cost of unemployment is much higher in intermediate age cohorts and in low job protection countries. This might contribute to explain the higher concern for the level of economic activity of central bankers in countries with younger population and more flexible labour markets.