“Regional borders, local unemployment and happiness”

In this paper we provide novel evidence on the effect of local unemployment rate on life satisfaction. We investigate how changes in unemployment rate in local administrative areas affect subjective well-being in Germany, allowing for the presence of spatial spillovers and considering the role played by regional borders. The results indicate that higher unemployment in the own local area of residence has a negative effect on satisfaction. Similarly, individuals’ happiness negatively correlates with the unemployment rate in contiguous local areas, but only if these areas are located in the same Federal State as the one where the individual lives. These results are robust to a variety of specifications, definitions, sample restrictions and estimation methods. Heterogeneity analysis reveals that these negative effects of local unemployment rate are larger for individuals with stronger ties to the job market and less secure jobs. This points to worries about own job situation as the main driver of individuals’ dislike for living in areas with high unemployment rate and tight labour markets. Consistently with this, the same asymmetric effect of local unemployment rate of surrounding areas is replicated when life satisfaction is replaced with a proxy for perceived job security as outcome variable.