Unemployment and happiness: A new take on an old problem

Andreas Knabe, Ronnie Schöb, Joachim Weimann 17 November 2010

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Recently, economists and policymakers alike have been paying more and more attention to subjective wellbeing (Graham 2010). The UK government just announced plans to start recording the nation’s happiness for the first time through a “general wellbeing index” following suggestions by France and Canada.

Unemployment, which is expected to remain high for some time across the G7 (IMF 2010), makes people unhappy. When asked “All things considered, how satisfied are you with your life as a whole these days?”, unemployed people report lower life satisfaction. These answers represent a respondent’s personal assessment of general life satisfaction, but give only limited insights into what makes people unhappy when they are unemployed – and what makes them happy when they are employed.

To shed some light on these questions, we can compare people’s general life satisfaction with their wellbeing on a moment-to-moment basis (experienced utility). A suitable tool to measure the latter type of wellbeing is the Day Reconstruction Method, which has been developed by Kahneman et al. (2004). The method combines a time-use study with the measurement of affective experiences. During a personal interview, respondents construct a diary of all activities they engaged in the preceding day. After this, they are given a list of positive and negative feelings and are asked to evaluate how strongly they felt each of these emotions during each activity listed in their diary, e.g. on a scale from 0 to 10. There are different ways to aggregate the answers. The most common procedure is to calculate the difference between the average score a respondent gives to all positive attributes and the average score of all negative attributes, yielding a measure of net affect. Kahneman et al. (2004) provide evidence of the correlation between net affect and objective circumstances that suggests that the use and interpersonal comparisons of affect measures are meaningful and add useful information to our understanding of wellbeing.

How do the unemployed feel during the day? Evidence from Germany

In a recent study (Knabe et al. 2010), we apply the Day Reconstruction Method to study the wellbeing effect of unemployment in Germany. We interviewed more than 600 employed and unemployed people, collecting data on how they used their time on a specific day, their affect levels during all the activities they were engaged in during the course of that day, their general life satisfaction, and their general life circumstances. This enables us to compare unemployed and employed people with respect to:

  • differences in the assessment of general life satisfaction,
  • differences in the assessment of emotional affects,
  • differences in the composition of activities during the whole course of the day, and
  • the difference in the duration of these activities.

Table 1 illustrates our findings. In line with previous life satisfaction research, our results first show that unemployed persons declare lower levels of satisfaction with their lives in general. Like Kahneman et al. (2004), we also find that employed people rank working and work-related activities among the least enjoyable activities. Our results are also supportive of the finding by Krueger and Mueller (2008) that the employed experience more positive feelings than the unemployed when engaged in similar activities (interestingly, this does not hold for childcare). These observations suggest that the impact of unemployment on wellbeing can be decomposed into two components.

First, there is a saddening effect of being unemployed. By comparing the emotional wellbeing of employed and unemployed persons during similar activities, we find that the unemployed report feeling more negative and less positive feelings than the employed. Second, there is a time-composition effect, i.e. the unemployed and the employed differ in how they spend their time. Becoming unemployed implies that people can substitute more enjoyable leisure activities for less enjoyable working time. This time-composition effect works against the saddening effect so that it is a priori unclear which of the two groups feels better over the course of the day.

Table 1. Net affect in different activities

By combining affect scores with people’s actual time-use, we find that the average experienced utility of an unemployed person does not differ from that of an employed person. The time-weighted net affect is even higher for the unemployed than for the employed, although the difference is not statistically significant. Apparently, the unemployed are able to compensate the utility gap from similar activities by spending the time that the employed have to spend on work and work-related activities on more enjoyable activities.

Happiness and the neoclassical theory of labour supply

The literature on life satisfaction has provided strong empirical evidence that unemployed people are strictly unhappier than employed people, even when controlling for income. This result has challenged the traditional neoclassical notion of unemployment, according to which people who become involuntarily unemployed lose access to resources for consumption – which makes them worse off – but are partially compensated by an increase in leisure time. Our findings may be a first attempt to reconcile the two views. Life satisfaction is a cognitive, judgmental construct of happiness. When asked to assess their satisfaction with life, respondents have to create a reference framework of what constitutes a satisfied life. While income, and thus one’s own availability of resources, is one of the main determinants in such a reference framework, the availability of more leisure does not seem to play any significant role. Life satisfaction, however, is not identical to experienced happiness. By applying the Day Reconstruction Method and taking time-use data into account, more weight is given to the rather negative feelings experienced during working hours (because more time is spent on work than leisure) in an employed person’s personal assessment of subjective wellbeing. This is perfectly in line with what the standard neoclassical utility function suggests: since individuals report a higher net effect of leisure activities compared to working and work-related activities, the time-composition effect implies that (experienced) utility is increasing in leisure. Hence, a time-weighted measure of wellbeing does not contradict the assumptions behind standard utility functions, but instead supports them.

Editor's Note: This column appears concurrently at Vox's consortium partner Oekonomenstimme.org at http://www.oekonomenstimme.org/artikel/2010/11/neue-erkenntnisse-zum-un-glueck-der-arbeitslosen/.

References

Graham, Carol (2010), “Happy peasants and miserable millionaires: Happiness research, economics, and public policy”, VoxEU.org, 30 January.

IMF (2010), World Economic Outlook (WEO): Rebalancing Growth, April.

Kahneman, D, AB Krueger, D Schkade, N Schwarz and A Stone (2004), “Toward National Wellbeing Accounts”, American Economic Review, 94:429-434.

Knabe, Andreas, Steffen Rätzel, Ronnie Schöb, and Joachim Weimann (2010), “Dissatisfied with Life but Having a Good Day: Time-use and Wellbeing of the Unemployed”, Economic Journal, 120(547):867-889.

Andreas Knabe, Ronnie Schöb and Joachim Weimann (2010), "Neue Erkenntnisse zum (Un-)Glück der Arbeitslosen," Oekonomenstimme.org, 17 November.

Krueger, AB and A Mueller (2008), The Lot of the Unemployed: A Time Use Perspective, IZA Discussion Paper No. 3490, May.

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Topics:  Frontiers of economic research

Tags:  unemployment, happiness, life satisfaction, utility