Hamish McRae: Retrieving Britain's well-being is not all about restoring our ailing economy

It is pretty miserable in Britain at the moment.

To say that is not to comment on the coalition's competence. It is simply to observe that the "misery index", a measure of economic pain developed by the economist Robert Barro in the 1970s and calculated by combining unemployment and inflation, is at its highest since the early 1990s – see right-hand chart.

While the inflation numbers should decline in the months ahead, it is hard to foresee any significant improvement in unemployment. At the beginning of the year overall employment was rising strongly, with the private sector creating three or four jobs for every one lost in the public sector. As we moved into the summer, the private sector, while still a net hirer, was able to create only half a job for every one lost in the public sector. As a result, overall employment, which had been rising quite strongly, has started to fall. The young and, in particular, new entrants into the labour force have been hardest hit. Until growth picks up it is hard to see the job market improving.

That leads into the whole debate about the nature of economic growth. There are plenty of reasons to suggest that growth should not be the sole aim of policy – some would say not even the primary aim. Growth certainly has to be sustainable, both from an environmental and a financial point of view. Ultimately, it is a means to an end – the wider goal of improving well-being. However, if you want jobs you have to have growth, and if the young are to have a higher standard of living than their parents, there will have to be reasonable growth rather than the anaemic performance of recent months.

The distinction between growth and well-being has been explored by many economists and a new report on the subject, How's Life?, was launched by the Organisation for Economic Co-operation and Development last week. Then, the OECD's secretary-general, Angel Gurría, said: "We have to consider a broader picture in our policy-making, because a 'growth as usual' approach is simply not enough. In the current difficult political context, it is of utmost importance to define core objectives besides level of income, such as improving our citizens' well-being ...."

That must be right. While there is a strong relationship between GDP per head and life satisfaction, there are other factors that matter even more: good health, a clean environment, a sense of community, good housing and a safe neighbourhood. Unsurprisingly, the Nordic countries, Canada and Australia rank highest on such measures, with the US and UK, plus the rest of Western Europe a little further down. Eastern Europe, Russia and, perhaps surprisingly, Japan are lower still. China comes at the bottom. This may seem a bit mechanical because different people attribute more or less importance to various aspects of life. Some would give higher priority to, say, public safety than others, or to being politically active. You can, however, play around with the numbers by going to the OECD website and ranking different aspects of well-being to construct your own index.

The OECD also looked at other indicators of well-being, including the more subjective one derived by asking people whether they felt optimistic or pessimistic about life on a particular day. I have shown this "How do you feel today?" index in the main chart. Broadly, it mirrors the mechanical one but there are some interesting differences. For example, the Japanese are much more optimistic than they "ought" to be. So, too, are the Chinese. The UK comes out rather higher on this index than on the other one, scoring above the US instead of below it.

This leads into a really interesting issue: to what extent is well-being changed by economic circumstances?

We know some things. We know, for example, that enforced unemployment makes people very unhappy; we know also that social isolation makes them unhappy; ditto a lack of physical safety. We know that good health is a key contributor to well-being. But some things that you might imagine would make people unhappy perhaps don't matter so much.

For example, the OECD ranks access to green space as something that is important to people's well-being. As a result, Scandinavian countries score higher than, say, Italy. But where would you rather live: Oslo or Rome? Or take commuting time. Few would say they enjoy commuting but if you look at what people do, rather than what they say, many are prepared to trade a long commute against the advantage of a larger house, decent garden and access to the countryside. Economists have a chunk of theory to cope with this: "revealed preference". People reveal what they really value by the choices they make.

Perhaps the most difficult area is work-life balance. Many people feel that they don't manage to get this right and the social pressure for at least two generations has been towards a shorter working week and earlier retirement. The present tussle about increasing the retirement age here in the UK (but also in just about every developed country) starts with the presumption that people want to retire earlier. It is quite true that many do. But, equally, some like the idea of being able to work beyond an arbitrary retirement age. The idea that work is always a negative and leisure always a positive does not square with what we as human beings want.

That leads to a further difficulty, and one that will arise again and again. The rules of the game are changing. If the next generation is to have both a higher standard of living and a better quality of life than the baby-boomers there will have to be changes in the implicit – and sometimes explicit – contract between individuals and society as a whole. It is not just a question of later retirement. It is also one of more flexibility in the workforce and in attitudes to life in general: greater willingness to change jobs, to travel further to look for work, to take greater responsibility for one's own health and so on.

None of this is easy. However, the more flexible we are the less miserable we are likely to be, even if that misery index is likely to deteriorate further in the months ahead.

An outline plan for Greece is agreed, but the rest relies on a lot of hopefulness

Europe is inching towards a fix for Greece. There are three set pieces in the sequence. The G20 finance ministers are meeting in Paris this weekend and the main issue is the role of the International Monetary Fund in the rescue. This will be followed by a eurozone summit in Brussels on 23 October to finalise the terms of the deal, with a 50 per cent cut in Greek debt seemingly now the certain outcome. Finally, there will be a full summit meeting in Cannes on 3 November, the date that is seen as the ultimate deadline for an agreement.

So far so good. The financial markets have taken the view – insofar as there is any single view – that the bailout will be done and that the banks which could go under as a result will be recapitalised one way or another. They still expect, to judge by the spreads on the bond markets, that Portugal will need revised terms; and that, while they have become much more optimistic about Ireland in recent weeks, on balance they will be lucky to get 100 cents in a euro on Irish debt. They recognise, however, that there is still a huge amount of detailed work to be done and not much time in which to do it. For example, it is unclear how bank capital will be bolstered, and equally unclear what role the European Central Bank will be expected to play in supporting the bond markets.

What is certain, though, is that the eurozone authorities are determined to draw a line in the sand. So they will try to ensure the deal is structured so that Greece is a one-off. In other words, contrary to the market perception, both Portugal and Ireland will be expected to pay their debts in full.

You can see the reason for this. It is to avoid any sense that we are in for a domino sequence of defaults. But you can also see the danger: if Greece can default, why not others? That fear, unfortunately, will not go away.