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Quantifying the psychological costs of unemployment: the role of permanent income

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  • Andreas Knabe
  • Steffen Ratzel

Abstract

Unemployment causes significant losses in the quality of life. In addition to reducing individual income, it also creates nonpecuniary and psychological costs. We quantify these nonpecuniary losses by using the life satisfaction approach. In contrast to previous studies, we apply Friedman's (1957) permanent income hypothesis by distinguishing between temporary and permanent effects of income changes. This allows us to account for intertemporal spillovers of income compensations. Our results show that the nonpecuniary costs of unemployment are only half as large compared to a standard estimation without this distinction. Nevertheless, the nonpecuniary costs of unemployment calculated with this modified quantification method are still about two times higher than its pecuniary costs. This confirms the high value of work for life satisfaction.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 43 (2011)
Issue (Month): 21 ()
Pages: 2751-2763

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Handle: RePEc:taf:applec:v:43:y:2011:i:21:p:2751-2763

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Cited by:
  1. John F. Helliwell & Haifang Huang, 2014. "New Measures Of The Costs Of Unemployment: Evidence From The Subjective Well-Being Of 3.3 Million Americans," Economic Inquiry, Western Economic Association International, vol. 52(4), pages 1485-1502, October.
  2. Grogan, Louise & Koka, Katerina, 2013. "Economic crises and wellbeing: Social norms and home production," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 241-258.
  3. Timothy J. Bartik, 2014. "How Effects of Local Labor Demand Shocks Vary with Local Labor Market Conditions," Upjohn Working Papers and Journal Articles 14-202, W.E. Upjohn Institute for Employment Research.
  4. Francesco Figari & Herwig Immervoll & Horacio Levy & Holly Sutherland, 2007. "Inequalities within Couples: Market Incomes and the Role of Taxes and Benefits in Europe," SOEPpapers on Multidisciplinary Panel Data Research 74, DIW Berlin, The German Socio-Economic Panel (SOEP).
  5. Helliwell, John & Huang, Haifang, 2011. "New measures of the costs of unemployment: Evidence from the subjective well-being of 2.3 million Americans," Working Papers 2011-3, University of Alberta, Department of Economics.
  6. Eva M. Berger, 2007. "The Power of Monthly Data in the GSOEP: How the Chernobyl Catastrophe Affected People's Life Satisfaction and Environmental Concerns," SOEPpapers on Multidisciplinary Panel Data Research 73, DIW Berlin, The German Socio-Economic Panel (SOEP).
  7. Ronnie Schöb, 2012. "Unemployment and Identity," CESifo Working Paper Series 3991, CESifo Group Munich.
  8. Eva M. Berger, 2008. "A Note on the High Stability of Happiness: The Minimal Effects of a Nuclear Catastrophe on Life Satisfaction," SOEPpapers on Multidisciplinary Panel Data Research 109, DIW Berlin, The German Socio-Economic Panel (SOEP).
  9. Heike Heidemeier & Ursula Staudinger, 2012. "Self-Evaluation Processes in Life Satisfaction: Uncovering Measurement Non-Equivalence and Age-Related Differences," Social Indicators Research, Springer, vol. 105(1), pages 39-61, January.
  10. Schöb, Ronnie, 2007. "Soziale Grundsicherung und Beschäftigung," Discussion Papers 2007/12, Free University Berlin, School of Business & Economics.

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