New Measures of the Costs of Unemployment: Evidence from the Subjective Well-Being of 3.3 Million Americans

By Helliwell, John F.; Huang, Haifang | Economic Inquiry, October 2014 | Go to article overview

New Measures of the Costs of Unemployment: Evidence from the Subjective Well-Being of 3.3 Million Americans


Helliwell, John F., Huang, Haifang, Economic Inquiry


I. INTRODUCTION

A growing literature uses data on subjective well-being (SWB) to study macroeconomic determinants of life quality and relate them to policy discussions. Di Telia, MacCulloch, and Oswald (2001) use self-reported life satisfaction from the Euro-barometer surveys to estimate the unemployment-inflation tradeoff. Wolfers (2003) uses the same source of data to evaluate the cost of business cycle volatility. Di Telia, MacCulloch, and Oswald (2003) focus on European style welfare state policies. There is also an active literature on the social-norm effects of unemployment (Chadi 2014; Clark 2003; Clark, Knabe, and Ratzel 2010; Powdthavee 2007; Shields and Price 2005; Shields, Price, and Wooden 2009).

In this study, we focus on the indirect or spillover effects of unemployment on the SWB of U.S. residents, especially those who are still employed. Using two recent large surveys, we estimate the well-being costs of unemployment separately for different segments of the population, and decompose the total cost into monetary and nonmonetary costs of job losses, and the population-wide indirect effects. The indirect effects in the aggregate are found to be much larger than the direct effects. This suggests that more precise estimation and understanding of the indirect effects of unemployment are essential for any cost-benefit analysis of policies designed to mitigate the economic and social effects of unemployment.

The two recent surveys we use are the Gallup-Healthways Well-Being Index from 2008 to 2011 and the Centers for Disease Control and Prevention's Behavioral Risk Factor Surveillance System (BRFSS) from 2005, or in cases from the early 1990s to 2010. Both are large daily surveys, giving us a combined sample of more than 3 million U.S. respondents since 2005. The surveys include measures of SWB that cover both life evaluations and emotional reports. The surveys' fine-grained geographic identifiers allow us to relate variations in well-being to local labor-market conditions. These two surveys will add question variety and much sample size and richness to a literature in which U.S. studies were based mostly on the happiness question in the General Social Survey (GSS).

In addition to bringing in new survey data and finer-grain unemployment statistics, we experiment with a variety of identification strategies in order to provide more conclusive evidence and a better understanding on the spillover effects of unemployment. In the literature, Di Telia, MacCulloch, and Oswald (2001) and Wolfers (2003) find significantly population-wide negative effects using European and U.S. survey data. Clark (2003) and Mavridis (2010), focusing on the labor force, uncover no statistically significant effects from the British Household Panel Study surveys. In this study, we examine both the sample of employed workers and the wider population. More importantly, our analysis adopts a wide range of model specifications to make use of different sources of variations including those in official unemployment statistics, external industrial trends, unemployment by occupation, and workplace downsizing. These experiments not only help check robustness, but also shed light on the structure and dynamics of the spillover effects of unemployment. In particular, we find evidence that the anticipation of future increases in local unemployment has a negative impact on the population's well-being, and that job security is an important channel underneath the indirect effects.

The structure of the study is as follows. Section II reviews the literature. Section III describes the data and the estimation method. Section IV presents empirical findings. Section V concludes.

II. LITERATURE REVIEW

The literature on the macroeconomics of well-being can be traced back to the seminal paper by Easterlin (1974) showing that the rise of income in the United States since 1946 was not accompanied by an increase in its population's happiness. …

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