Unemployment As A Social Norm: Psychological Evidence from Panel Data

This paper uses data from the first seven waves of the British Household Panel Survey to test a key implication of a social norm of employment: that the utility of the unemployed rises with the unemployment rate of their reference group. The GHQ-12 measure of individual well-being is taken as a proxy utility measure, and the unemployment rate in the region, of the partner, and in the household are taken as measures of adherence to the employment norm. The unemployment of "relevant others" is shown often to reduce the well-being of the employed, but to be strongly positively correlated with the well-being of the unemployed. This result, far stronger for men, is robust to controls for unobserved individual heterogeneity. Last, panel data shows that those whose well-being fell the most upon entering unemployment are both somewhat more likely to search for a new job and less likely to remain unemployed. Together, these findings suggest a psychological explanation of both unemployment polarisation and labour market hysteresis, based on the utility effects of reduced adherence to the employment norm in the reference group.