Economic Intuition Studies: Unemployment & Happiness
One worry of policy makers worldwide is persistent unemployment. The
traditional explanation cites skill erosion: the skills of those unemployed
for a long time tend to disappear as new technologies replace those they are
familiar with.
Now some researchers have a different explanation, based on the long-term
psychological effect of joblessness. They suggest that past unemployment can
have an important impact on well-being and tested their thesis with research
on 25,000 men and women. They conclude:
*Unemployment has a "scarring effect": employed men and women are
systematically happier than those unemployed and satisfaction is greater for
those who suffered less unemployment.
* Unemployment today affects happiness now and up to three years in the
future, but as the number of unemployment spells rise, the habituation
effect
starts to work, reducing the felt unhappiness from unemployment.
*Researchers consider the "habituation effect" a key finding: men unemployed
60 percent of the time over the three years of the study become indifferent
between working and not working.
*These effects are not as strong with women.
Although some caveats may be made about how happiness is measured, these
findings add another factor in explaining the risks of persistent
unemployment. And the intriguing aspect of the work lies in the fact that,
unlike in previous theories, the unemployed compare their current state with
the past (and not with the state of others). A landmark paper on this is
"SCARRING: THE PSYCHOLOGICAL IMPACT OF PAST UNEMPLOYMENT" Andrew Clark*,
Yannis Georgellis# and Peter Sanfey? This literature has concentrated on
job
satisfaction, showing links with quits (Clark et al., 1999, and Freeman,
1978), productivity (Mangione and Quinn, 1975) and absenteeism (Clegg,
1983).
We believe this paper to be one of the first to use panel data to link life
satisfaction to an observable labour market outcome.This paper has used
eleven waves of the GSOEP to model the relationship between unemployment and
life satisfaction. We find, as is usual, that current unemployment is
associated with sharply lower levels of subjective well-being. Second, we
appeal to the panel aspect of the data and show that past unemployment
(using
information from previous waves, rather than recall data) reduces the
well-being of those who are currently in work: for them, past unemployment
scars. Third, we show that the well-being effect of current unemployment.
This paper thus contributes to the small literature relating subjective
well-being to labour market behaviour is attenuated for those who have
experienced more unemployment in the past, consistent with habituation. The
estimated coefficients suggest that men who have been unemployed for roughly
sixty per cent of their time active in the labour force over the past three
years are indifferent (in terms of current life satisfaction) between
current
employment and unemployment. Last, we have tried to show that the change in
a
subjective variable from one wave to another, here the drop in life
satisfaction upon becoming unemployed, contains useful
information regarding individuals' subsequent behaviour in the labour
market.
Our results in this paper are an attempt to bridge subjective measures of
utility, of which many economists remain suspicious, with observable
behaviour in the labour market. Previous attempts to test for hysteresis in
the labour market using aggregate time series data have produced somewhat
mixed results and are open to a number of different interpretations. To the
extent that one can give credence to self-reported measures of satisfaction,
our results may serve as a warning of the dangers of long-term unemployment.
Not only are employers reluctant to hire those who have been unemployed for
a
lengthy period, but the evidence in this paper suggests that the unemployed
themselves, while clearly unhappy relative to the employed, can become
indifferent to the prospect of employment after a lengthy spell out of a
job.
If this result holds generally, as it does, the search for measures to
reduce
long-term unemployment takes on an even greater urgency.
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