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Quantifying the psychological costs of unemployment: the role of permanent income

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  • Andreas Knabe
  • Steffen Ratzel

Abstract

Unemployment causes significant losses in the quality of life. In addition to reducing individual income, it also creates nonpecuniary and psychological costs. We quantify these nonpecuniary 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 the nonpecuniary costs of unemployment are only half as large compared to a standard estimation without this distinction. Nevertheless, the nonpecuniary costs of unemployment calculated with this modified quantification method are still about two times higher than its pecuniary costs. This confirms the high value of work for life satisfaction.

Suggested Citation

  • Andreas Knabe & Steffen Ratzel, 2011. "Quantifying the psychological costs of unemployment: the role of permanent income," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2751-2763.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:21:p:2751-2763
    DOI: 10.1080/00036840903373295
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    More about this item

    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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