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Why Does Unemployment Hurt the Employed?: Evidence from the Life Satisfaction Gap between the Public and Private Sectors

  • Simon Luechinger
  • Stephan Meier
  • Alois Stutzer

High rates of unemployment entail substantial costs to the working population in terms of reduced subjective well-being. This paper studies the importance of individual economic security, in particular, job security, in workers' well-being by exploiting sector-specific institutional differences in the exposure to economic shocks. Public servants have stricter dismissal protection and face a lower risk of their organization's bankruptcy than do private sector employees. The empirical results for individual panel data for Germany and repeated cross-sectional data for the United States and the European Union show that the sensitivity of subjective well-being to fluctuations in unemployment rates is much lower in the public sector than in the private. This suggests that increased economic insecurity constitutes an important welfare loss associated with high general unemployment.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.85420.de/diw_sp0106.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 106.

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Length: 37 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp106
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  1. Stewart, M.B. & Swaffield, J.K., 1996. "Constraints on the Desired Hours of Work of British Men," The Warwick Economics Research Paper Series (TWERPS) 468, University of Warwick, Department of Economics.
  2. Di Tella, R. & MacCulloch, R.J.: Oswald, A.J., 1997. "The Macroeconomics of Happiness," Papers 19, Centre for Economic Performance & Institute of Economics.
  3. Clark, Andrew E. & Postel-Vinay, Fabien, 2005. "Job Security and Job Protection," IZA Discussion Papers 1489, Institute for the Study of Labor (IZA).
  4. Simon Luechinger & Alois Stutzer & Rainer Winkelmann, 2007. "The Happiness Gains from Sorting and Matching in the Labor Market," SOEPpapers on Multidisciplinary Panel Data Research 45, DIW Berlin, The German Socio-Economic Panel (SOEP).
  5. Raphael, Steven & Winter-Ember, Rudolf, 2001. "Identifying the Effect of Unemployment on Crime," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 259-83, April.
  6. Alois Stutzer & Rafael Lalive, 2004. "The Role of Social Work Norms in Job Searching and Subjective Well-Being," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 696-719, 06.
  7. Anna Öster & Jonas Agell, 2007. "Crime and Unemployment in Turbulent Times," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 752-775, 06.
  8. Becchetti, Leonardo & Castriota, Stefano & Giuntella, Giovanni Osea, 2010. "The effects of age and job protection on the welfare costs of inflation and unemployment," European Journal of Political Economy, Elsevier, vol. 26(1), pages 137-146, March.
  9. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
  10. Luechinger, Simon & Meier, Stephan & Stutzer, Alois, 2006. "Bureaucratic Rents and Life Satisfaction," IZA Discussion Papers 1964, Institute for the Study of Labor (IZA).
  11. Sanz-de-Galdeano, Anna & Turunen, Jarkko, 2006. "The euro area wage curve," Economics Letters, Elsevier, vol. 92(1), pages 93-98, July.
  12. Alois Stutzer & Bruno S. Frey, 2004. "Reported Subjective Well-Being: A Challenge for Economic Theory and Economic Policy," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 124(2), pages 191-231.
  13. Ebbinghaus, Bernhard & Eichhorst, Werner, 2006. "Employment Regulation and Labor Market Policy in Germany, 1991-2005," IZA Discussion Papers 2505, Institute for the Study of Labor (IZA).
  14. Falk, Armin & Kuhn, Andreas & Zweimüller, Josef, 2009. "Unemployment and Right-wing Extremist Crime," CEPR Discussion Papers 7467, C.E.P.R. Discussion Papers.
  15. Clark, Andrew E & Oswald, Andrew J, 1994. "Unhappiness and Unemployment," Economic Journal, Royal Economic Society, vol. 104(424), pages 648-59, May.
  16. Andrew E. Clark, 2003. "Unemployment as a Social Norm: Psychological Evidence from Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 289-322, April.
  17. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2005. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," Discussion Papers of DIW Berlin 511, DIW Berlin, German Institute for Economic Research.
  18. Rafael Di Tella & Robert MacCulloch, 2005. "Partisan Social Happiness," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 367-393.
  19. Richard B. Freeman, 1985. "How do Public Sector Wages and Employment Respond to Economic Conditions," NBER Working Papers 1653, National Bureau of Economic Research, Inc.
  20. Alan B. Krueger, 1988. "The Determinants of Queues for Federal Jobs," NBER Working Papers 2499, National Bureau of Economic Research, Inc.
  21. Nicola Fuchs-Schundeln & Matthias Schundeln, 2005. "Precautionary Savings and Self-Selection - Evidence from the German Reunification "Experiment"," Harvard Institute of Economic Research Working Papers 2069, Harvard - Institute of Economic Research.
  22. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  23. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
  24. Paul Frijters & John P. Haisken-DeNew & Michael A. Shields, 2004. "Investigating the Patterns and Determinants of Life Satisfaction in Germany Following Reunification," Journal of Human Resources, University of Wisconsin Press, vol. 39(3).
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