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Quantifying the Psychological Costs of Unemployment: The Role of Permanent Income

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  • Andreas Knabe
  • Steffen Rätzel

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.

Suggested Citation

  • Andreas Knabe & Steffen Rätzel, 2007. "Quantifying the Psychological Costs of Unemployment: The Role of Permanent Income," SOEPpapers on Multidisciplinary Panel Data Research 32, DIW Berlin, The German Socio-Economic Panel (SOEP).
  • Handle: RePEc:diw:diwsop:diw_sp32
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    Cited by:

    1. Rowena Pecchenino, 2014. "The Economic Consequences of Despair," Economics, Finance and Accounting Department Working Paper Series n254-14.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    2. Figari, Francesco & Immervoll, Herwig & Levy, Horacio & Sutherland, Holly, 2007. "Inequalities Within Couples: Market Incomes and the Role of Taxes and Benefits in Europe," IZA Discussion Papers 3201, Institute for the Study of Labor (IZA).
    3. Ronnie Schöb, 2016. "Labor market policies, unemployment, and identity," IZA World of Labor, Institute for the Study of Labor (IZA), pages 270-270, June.
    4. repec:taf:applec:v:49:y:2017:i:13:p:1311-1325 is not listed on IDEAS
    5. Axelrad, Hila & Luski, Israel & Malul, Miki, 2016. "Behavioral biases in the labor market, differences between older and younger individuals," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 60(C), pages 23-28.
    6. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2016. "Partnership, Gender, and the Well-Being Cost of Unemployment," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 129(3), pages 1255-1275, December.
    7. 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.
    8. Heike Heidemeier & Ursula Staudinger, 2012. "Self-Evaluation Processes in Life Satisfaction: Uncovering Measurement Non-Equivalence and Age-Related Differences," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 105(1), pages 39-61, January.
    9. 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.
    10. Clemens Hetschko, 2016. "On the misery of losing self-employment," Small Business Economics, Springer, vol. 47(2), pages 461-478, August.
    11. 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.
    12. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2017. "The subjective well-being of workfare participants: insights from a day reconstruction survey," Applied Economics, Taylor & Francis Journals, vol. 49(13), pages 1311-1325, March.
    13. Adrian Chadi & Clemens Hetschko, 2017. "Income or Leisure? On the Hidden Benefits of (Un-) Employment," IAAEU Discussion Papers 201706, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    14. Nabi, Mahmoud Sami & Boughzala, Mongi, 2009. "Essai de chiffrage du coût social du chômage des jeunes diplômés en Tunisie
      [Social cost of young unemployed graduates in Tunisia]
      ," MPRA Paper 84438, University Library of Munich, Germany.
    15. 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.
    16. Wolf, Tobias & Hetschko, Clemens & Schöb, Ronnie, 2016. "Income Support, (Un-)Employment and Well-Being," Annual Conference 2016 (Augsburg): Demographic Change 145860, Verein für Socialpolitik / German Economic Association.
    17. 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.
    18. Pecchenino, Rowena A., 2015. "Have we cause for despair?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 58(C), pages 56-62.
    19. 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).
    20. Ronnie Schöb, 2013. "Unemployment and Identity," CESifo Economic Studies, CESifo, vol. 59(1), pages 149-180, March.
    21. Schöb, Ronnie, 2007. "Soziale Grundsicherung und Beschäftigung," Discussion Papers 2007/12, Free University Berlin, School of Business & Economics.
    22. Crost, Benjamin, 2016. "Can workfare programs offset the negative effect of unemployment on subjective well-being?," Economics Letters, Elsevier, vol. 140(C), pages 42-47.

    More about this item

    Keywords

    unemployment; happiness; life satisfaction; permanent income;

    JEL classification:

    • J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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