Inflation, unemployment and subjective wellbeing: nonlinear and asymmetric influences of economic growth

Abstract

Plausible economic growth would undoubtedly offset the unemployment-output tradeoff to subjective wellbeing and relieving labor market discrepancies. This study expands on the tradeoff exploration considering the impact of unemployment-inflation on SWB and, output growth on unemployment using output gap as the tradeoff regulator and using a quadratic specification and the Nonlinear Autoregressive Distributed Lag, respectively. Authors explored this effects and specifically the nonlinear response of subjective wellbeing (SWB) to inflation, unemployment and output, and the asymmetric responses by unemployment to business cycle output for Kenya. The main results report that first, output per capita gap is important in regulating the inflation-unemployment tradeoff and negativities to SWB with costlier effects by unemployment than inflation. Secondly, unemployment trades off with long run shocks in cyclical output although they exhibit symmetric nature of Okun law. Thirdly, unemployment negatively relates to fiscal policy in the long run as the tradeoff is supported. Therefore, to alleviate SWB, feasible unemployment alleviation policies are required while to incarcerate the persisting unemployment and minimizing labor market discrepancies, feasible labor supply and fiscal side policies should be implemented since short run and including policy specific reforms. This, would therefore supplement the usually time-lagging effects by implemented structural reforms.