Self-Reported Satisfaction and the Economic Crisis of 2007-10: Or How People in the UK and Germany Perceive a Severe Cyclical Downturn

Self-reported satisfaction measures respond to a great variety of socio-demographic characteristics as well as the job and living environment. In this paper we ask whether the recent financial market crisis has caused a deterioration of satisfaction not only for the unemployed but also for those out of the labour force and especially those in employment. The focus of our analyses is on the pattern of life, job and health satisfaction over time and the influence of unemployment rates, inflation rates andGDP growth. We compare the UK and Germany, two countries with different employment protection regulations and different consequences of the crisis for the labour market. For our analysis we use data from the German Socio-Economic Panel (SOEP) and the British Household Panel Study (BHPS) for the period 1996 to 2010 and supplement this with annual information on macroeconomic indicators. We estimate Ordered Logit and OLS models, both with individual fixed effects. We were somewhat surprised to find significant differences between the formerly separated parts of Germany even twenty years after re-unification - not only in satisfaction but also its determinants. While people living in the western part of Germany report somewhat lower satisfaction in 2009 compared to the previous years, those living in the eastern part report higher levels than in 2006, the year before the financial crisis started. This could be due to the largely different employment structures in both parts of Germany. As exports and not so much services were hit by the crisis, western German federal states were facing stronger negative demand pressures. Our findings for the UK are similar to the East German evidence, as year dummies for the crisis years 2008 to 2010 do not show any sign of a decrease, except for a fall in job satisfaction in 2010. Looking at the impact of macroeconomic indicators such as GDP growth, inflation and unemployment, we find mostly diverse effects between the two German regions but similar between West Germany and the UK. First of all, satisfaction with life is related to the business cycle, we observe positive reactions to an increase in GDP in the whole of Germany and negative reactions to rising inflation in the UK and Germany. However, the strongest and most robust result concerns the relationship between self-reported satisfaction and the regional unemployment rate: The higher regional unemployment the more satisfied people in East Germany seem to be irrespective their current labour market status. Both unemployed and employed seem to be more satisfied with their lives, jobs and health when unemployment is rising around them. At the same time, the overall level of unemployment has a significantly negative effect. In West Germany and the UK, on the contrary, the reverse is true: overall unemployment is positively related to satisfaction and regional unemployment in West Germany is negatively related. Interestingly, weget similar though somewhat weaker results when looking at job and health satisfaction. Hence, though the direct costs of the financial and economic crisis in form offalling GDP seem to have been by far larger than the psychological costs, we find some limited additional costs in the crisis years, and a considerable impact of regionaland national unemployment rates.