Unemployment: It Is More Than the Money

It is easy for people (especially for economists) to think that the loss of a job is simply the loss of income. While the gain of a job decreases leisure and increases income, the loss of a job increases leisure and decreases income. And to mitigate the effect of temporarily losing a job, we just need to give them temporary financial aid (unemployment benefit), which can also help stabilize the economy according to Keynesian economics. That's it, right?

But if we take a moment to realize that our well-being is much more than just the consumption of products and services, we will realize the costs and benefits of getting and losing a job are much than that.

In Richard Layard's book Happiness: Lessons from a New Science, he found that based on the German Socio-Economic Panel data, the negative impact on unemployed people's happiness is much more than the loss of income. He argued it is the "self-respect and social relationships created by work" being destroyed (Layard 2005, p.67). And according to a comprehensive study of the impact of macroeconomic factors on happiness, becoming unemployed feels as bad as losing about $3800 of income a year (this does not necessarily mean getting $3800 can offset the psychological cost). They concluded that "[s]tandard economics tends to ignore what appear to be important psychic costs of recessions"(Tella, MacCulloch and Oswald 2003).

There is also a clever study about the relationship between self-reported life satisfaction and the "social norm to work" in Switzerland (Stutzer and Lalive, 2004). The study looked at the social norm to work in different cantons of Switzerland (which is revealed in the proportion of voters who favored a reduction in unemployment benefit) and the self-reported life satisfaction in these cantons. What they found was that, unemployed people were, of course, less happy than the employed. But more than that, when the social norm to work is higher in a canton, the life satisfaction of those who were unemployed was also lower than their counterpart in other cantons. It can be roughly illustrated as below:



Compared to the weaker-norm cantons, the employed felt slightly more satisfied with life in the cantons which have stronger norm. But once they lose their job, they would feel very miserable, relatively. The social norm affected how much their employment status had an impact on their life satisfaction.

If you are a policymaker who wants to mitigate the negative effect of unemployment on the unemployed, you should not only focus on the unemployment benefit. Helping them get back to work as soon as possible (e.g. through job training programs) is perhaps more important.



Reference:
- Layard, R. (2005). Happiness: Lessons from a New Science. London, England: Penguin Group.
- Tella, R.D., MacCulloch, R.J., Oswald, A.J. (2003). THE MACROECONOMICS OF HAPPINESS. Review of Economics and Statistics. 85(4), 809-827. doi.org/10.1162/003465303772815745
- Stutzer, A., Lalive, R. (2004). The Role of Social Work Norms in Job Searching and Subjective Well-Being. Journal of the European Economic Association. 2(4), 696–719.