In Discussion Paper No. 1093, Liliana Winkelmann and Research Affiliate Rainer Winkelmann perform an empirical investigation into the link between unemployment and individual well-being. This analysis allows the critical evaluation of one of the implications of natural rate theories of unemployment. It also has implications for a cost-benefit analysis of government programmes aimed at mitigating the impact of unemployment.

The study is based on self-reported life satisfaction data collected in the German Socio-Economic Panel. Using these data, the authors perform a fixed effect panel estimation and find a large and well-determined negative effect of unemployment, thereby rejecting the argument of reverse causation. The lack of evidence for a similar effect of non-participation casts doubt on the natural rate view of unemployment. Further, they decompose the total well-being costs of unemployment and find that between 85-93 per cent are non-pecuniary, and that only 7–15 per cent are pecuniary. The main implication is that the benefits of employment generating policies exceed the benefits of policies that are designed to mitigate the effects of unemployment through income transfers.

Unemployment: Where Does It Hurt?
Liliana Winkelmann and Rainer Winkelmann

Discussion Paper No. 1093, January 1995 (HR)