Subjective well‐being and aggregate unemployment: further evidence
| DOI | http://doi.org/10.1111/j.1467-9485.2011.00562.x |
| Published date | 01 November 2011 |
| Author | Carsten Ochsen |
| Date | 01 November 2011 |
SUBJECTIVE WELL-BEING
AND AGGREGATE UNEMPLOYMENT:
FURTHER EVIDENCE
Carsten Ochsen*
ABSTRACT
According to the literature, individual well-being is negatively related to aggre-
gate unemployment. This study examines whether the distribution of aggregate
unemployment by duration affects well-being, in addition to the level of unem-
ployment. Different explanations are provided to indicate how the shares of
short-term (up to 3 months) and long-term (more than 1 year) unemployed
people could affect the well-being of the employed and unemployed. Using data
from almost 300,000 individuals from 11 EU countries, we find significant effects
of both shares on life satisfaction. Among the unemployed, for example, we find
a U-shaped effect of the distribution of aggregate unemployment by duration on
subjective well-being, which compensates to some extent for the negative effect
of the unemployment rate.
II
NTRODUCTION
The contemporaneous correlation between individual unemployment and well-
being has been found to be sizeable and significantly negative in the litera-
ture,
1
and the question of whether unemployment duration matters at the
individual level has been addressed in a number of studies.
2
In addition, there
is evidence that aggregate unemployment is negatively related to well-being,
3
and that this effect is much lower in the public sector than in the private.
4
However, little is known about what is behind the effect of aggregate unem-
ployment. It is simply possible that the level of aggregate unemployment
*University of Applied Labour Studies and Max Planck Institute for Demographic Research
1
See, for example, Blanchflower (2001), Bjo
¨rklund and Eriksson (1998), Clark (2003),
Clark and Oswald (1994), Di Tella et al. (2001), Frey and Stutzer (2000), and Korpi (1997).
2
See, for example, Clark and Oswald (1994), Winkelmann and Winkelmann (1998), Clark
et al. (2001), Lucas et al. (2004), Clark (2006), and Clark et al. (2008).
3
For example, Di Tella et al. (2001, 2003), Graham and Pettinato (2001), Ochsen and Wel-
sch (2007), and Wolfers (2003) find a significant negative effect of aggregated unemployment
on well-being at the individual level, robust to different specifications.
4
See Luechinger et al. (2010).
Scottish Journal of Political Economy, Vol. 58,No. 5, November 2011
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634
causes (economic) uncertainty and anxiety about future development.
5
A fur-
ther explanation is the distribution of aggregate unemployment by duration.
With respect to the shares of short- and long-term unemployed people, signifi-
cant international differences exist. For example, the average share of short-
term (up to 3 months) vs. long-term (more than 1 year) unemployed people
between 1980 and 2003 is 71% and 8% in the United States, and 8% and
64% in Italy.
Hence, the unemployment rate includes further information that is relevant
to the risk of becoming unemployed and the expected duration of unemploy-
ment. For example, a large share of short-term unemployed at a given level of
aggregate unemployment means that, on average, expected individual unem-
ployment is of short duration as well. This can have a bearing on the assess-
ment of individual loss of income and social standing in case of
unemployment. Hence, this alleviates the negative effect of aggregate unem-
ployment. Alternatively, this also corresponds to a larger number of newly
unemployed in a given period. This means that the likelihood of becoming
unemployed increases which, in turn, can amplify the negative effect of aggre-
gate unemployment on subjective well-being. We refer to the effect of a chang-
ing short-term share as flow effect.
A second effect comes from a change in the share of long-term unemployed.
An increase in this share might affect subjective well-being negatively, because
the expected severity of unemployment increases. Hence, a larger share of
long-term unemployed could amplify the negative effects of aggregate unem-
ployment on individual well-being. By the same token, however, the likelihood
of becoming unemployed decreases, which alleviates the negative effect of
aggregate unemployment on subjective well-being. The effect resulting from a
change in the long-term share will be termed as the severity effect.
As miscellaneous explanations are possible, this study examines whether
and how the distribution of aggregate unemployment by duration affects indi-
vidual well-being at a given level of unemployment. This assessment is derived
using data from almost 300,000 individuals from 11 EU countries drawn from
the Eurobarometer. The major results, first, are that we find significant evi-
dence for a positive severity effect on unemployed and working people. Sec-
ond, we also find significant evidence for a positive flow effect for the
unemployed and different education groups. According to our results, a signi-
ficant U-shaped effect of the distribution of aggregate unemployment by dura-
tion on subjective well-being exists, and the negative level effect of the
unemployment rate is compensated to some extent by positive flow and sever-
ity effects. Third, using an alternative specification that allows for the dura-
tion-specific risk of becoming/remaining unemployed, we arrive at similar
conclusions. According to this model, only the expected duration of
4–12 months of unemployment reduces well-being significantly among
employed and unemployed people. Finally, a further result that is important
5
See, for example, Luechinger et al. (2010) for a detailed discussion of the effects of unem-
ployment on economic security.
SUBJECTIVE WELL-BEING AND AGGREGATE UNEMPLOYMENT 635
Scottish Journal of Political Economy
©2011 The Author. Scottish Journal of Political Economy ©2011 Scottish Economic Society
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