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

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  • Andreas Knabe

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Steffen Rätzel

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

Unemployment causes significant losses in the quality of life. In addition to reducing individual income, it also creates non-pecuniary, psychological costs. We quantify these non-pecuniary 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, without this distinction, the non-pecuniary costs of unemployment are overestimated by roughly one-third. Nevertheless, the non-pecuniary costs of unemployment with this modified quantification method still amount to 2.3 (1.5) times the pure pecuniary costs of unemployment for men (women).This confirms the high value of work for life satisfaction.

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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 07012.

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Length: 16 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:mag:wpaper:07012

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Keywords: unemployment; happiness; life satisfaction; permanent income;

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Cited by:
  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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).
  6. John F. Helliwell & Haifang Huang, 2011. "New measures of the costs of unemployment: Evidence from the subjective well-being of 3.3 million Americans," NBER Working Papers 16829, National Bureau of Economic Research, Inc.
  7. 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.
  8. Ronnie Schöb, 2012. "Unemployment and Identity," CESifo Working Paper Series 3991, CESifo Group Munich.
  9. Schöb, Ronnie, 2007. "Soziale Grundsicherung und Beschäftigung," Discussion Papers 2007/12, Free University Berlin, School of Business & Economics.
  10. Eva M. Berger, 2008. "A Note on the High Stability of Happiness: The Minimal Effects of a Nuclear Catastrophe on Life Satisfaction," Discussion Papers of DIW Berlin 803, DIW Berlin, German Institute for Economic Research.

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