[AVIS D’EXPERT] Rising prices have put many households in dire straits. And this is not without consequence to their happiness. Decryption with economist Mickaël Mangot.
Inflation is faster in the euro zone. In France, consumer prices rose by 6.1% year-on-year in July, according to the latest data published by INSEE. As household purchasing power comes under pressure, what consequences can we expect in terms of well-being and happiness? Decryption with Mickaël Mangot, specialist in behavioral economics and economics of happiness, Essec teacher and director general of the Institute of the Economy of Happiness.
Inflation legitimately worries many households, especially the most modest people who are already struggling to make ends meet. Do we have any idea of its effect on people’s happiness?
Yes, we have many economic studies of happiness that look at the links between inflation and happiness. They concluded, not surprisingly, that inflation harms happiness. When consumer prices rise sharply, people’s life satisfaction tends to decline.
Why are rising prices bad for happiness?
Three mechanisms were observed by the researchers and help to explain this relationship. First, of course, there is the decline in purchasing power. This leads to less consumption of leisure activities (going to the cinema, to restaurants, vacations, etc.) which, in normal times, have a positive effect on happiness, at least in the short term.
Inflation also raises concerns about uncertainty about living standards. In the end, inflation feeds the bad feeling of being “cheated”. When the prices rise sharply, one may be deceived by the producers or distributors if one has the impression that the rise in prices is not fully justified by the raw materials. In other words, you will be bitter towards your boss if he does not respond positively to requests for a salary increase and you will be suspicious of the reasons given (such as the need to remain competitive).
You say inflation pushes us to consume less. What is the relationship between consumption and level of life satisfaction?
Consumption helps increase happiness, but rarely. A consensual result of the sciences of happiness is that people adapt easily to almost all kinds of changes in their lives. This applies, for example, to purchases of durable goods (a new car, a new house, etc.) where the additional happiness generated lasts only a few months (for the car) or at best one or two years (the house) . Compare this with the duration of the credit…
There are some consumptions that nevertheless leave more lasting traces of happiness, such as the consumption of experiences (new things that we do and that contribute to our identity, such as trips, shows or challenges in sport) or more leisure consumption. If we systematically cut these budgets when purchasing power is reduced by inflation, this can have huge consequences for happiness.
Does inflation leave lasting marks on happiness and economic behavior?
Yes, we observed that in the long term, people who experienced periods of high inflation in the past were less satisfied with their lives than people with similar characteristics who did not experience the same period of high inflation. The idea is that these people remember these times of high economic uncertainty and this promotes the view that economic trouble may return. People who, on the other hand, have never experienced high inflation, ignore what is written in the history books and neglect the risk of inflation until… it shows itself. Personal experiences and non-living historical facts do not carry the same weight as perceptions.
We can see the same phenomenon in storage practices. People who experienced periods of rapidly accelerating inflation later held fewer fixed-rate investments because they had vivid memories of their fall during the period of rising rates and interest rates.
Faced with rising prices, central banks are just beginning to raise their interest rates, at the risk of triggering a recession. Are recessions bad for happiness?
Yes, without a doubt. A country’s average happiness follows a short-term growth curve. It increases during booms and decreases during recessions. The relationship is also asymmetrical. The effects of negative growth on happiness are stronger than those of positive growth.
Why do recessions reduce happiness so much?
Recessions bring (usually) happiness, mainly because they feed rising unemployment. However, the happiness of the unemployed decreases significantly compared to the active workers (who have similar characteristics). It is clear that personal unemployment is a negative shock for happiness, to which we cannot fully adapt and leaves long-term consequences.
The increase in unemployment punishes the average happiness because it has an effect on those who lose their job but also on those who fear losing it. Recessions raise concerns about the risk of job loss for many other workers.
Finally, recessions contribute to income stagnation, a negative impact on wealth among those who see their financial savings decline along with stock market prices, and an increase in precautionary measures. All this leads to a reduction in consumption (especially of durable goods and entertainment) and, with it, its potential to generate short-term happiness.
Don’t recessions have a positive effect on anyone?
Paradoxically, yes. Several counterintuitive positive effects of recessions have been observed. People who were out of work before the recession are likely to see their burden lighten. It has even been observed that at very high rates of unemployment (more than 20% of a workplace), there is no longer any psychological penalty for being unemployed! When the unemployment rate is very high, unemployment is no longer experienced as a social stigma.
Another surprising phenomenon, recessions can improve physical and mental well-being because reduced working hours (with reduced overtime) offer more time to… sleep, cook, play sports or taking care of children. .
Finally, recessions seem to have a long-term positive effect on educated young people who start their careers in these difficult times. Because there is a chaotic entry into the job market, their expectations are subsequently lowered – in other words, they are less megalomaniacs! This renewed humility is why they are later more satisfied with their jobs and their lives.