Happiness and Economics: How the Economy and Institutions Affect Human Well-Being

CHAPTER 5 Employment

Chapter 5 EMPLOYMENT 5.1 Introduction Most economists see unemployment as an unfortunate event to be avoided as much as possible. To become unemployed is considered to be costly and, above all, involuntary. Government should intervene in order to raise the aggregate demand for goods. To produce the additional goods, more labor would be required and unemployment would fall. This view is behind Keynesian theory, which dominated the field in the 50s and 60s and is now experiencing a comeback. But there are also economists who hold quite a different view. According to the “new classical macroeconomics,” unemployment is voluntary. People choose to leave employment because they find the burden of work and the wage paid unattractive compared to being unemployed and getting unemployment benefits and leisure. Involuntary unemployment is a disequilibrium phenomenon and is relatively short-term, until individuals and firms have adjusted. Government interventions to jack up demand result in higher future inflation and should therefore be avoided. As people choose to be unemployed, because they expect to be better off, it should not affect their happiness. Few politicians, social scientists, or laypeople subscribe to this view. It is taken to be cynical, as it seems obvious that workers are dismissed and that unemployment is an unfortunate state to be in. However, by analyzing the unemployed as having made a choice between alternatives , the economists of the new classical persuasion have drawn attention to certain aspects that are hard to dispute: (a) There are certainly some workers who prefer not to work and to enjoy the benefits of a social security system, which in some countries almost totally compensates for the loss of income. 96 CHAPTER 5 (b) Much unemployment is transitory. The unemployed soon find work again, often in a more productive sector, and earn higher wages than before. Dismissing workers as a reaction to demand and cost considerations also means that people will be hired again. When workers cannot be laid off for legal reasons, firms are also reluctant to hire them. (c) Many people who are officially unemployed are in fact working in the shadow economy where they are not burdened by taxes and social security contributions. In recent years, this part of the economy has reached a considerable size in many countries. In Belgium, Greece, Italy, Norway, Portugal, Spain, and Sweden it is around, and sometimes much above, 20 percent of official GDP for the period 1996–97. (See Table 2.3 in chapter 2.) In all three cases, it is not unreasonable to assume that the unemployed do not suffer, and that some of them are even quite satisfied with their situation. The issue of whether, and to what extent, the unemployed are dissatis fied remains unresolved. For that reason, happiness research on unemployment is of particular interest and importance. In this chapter, four questions and their ramifications will be discussed in sections 5.2 through 5.5:  What is the level of happiness of an unemployed person?  How does general unemployment in an economy affect happiness?  What influences work satisfaction?  How much happiness does leisure provide? 5.2 Personal Unemployment How particular people are affected when they become unemployed needs to be analyzed with the help of a microanalysis that looks at individual data. Such a study (Di Tella, MacCulloch, & Oswald 2001) was undertaken for 12 European countries over the period 1975–91, employing Euro-Barometer data. In a cross-section sample, the “classical ” life satisfaction question was asked: “On the whole, are you very satisfied, fairly satisfied, not very satisfied, or not at all satisfied with the life you lead?” The analysis—which controls for a great number of other determinants of happiness, such as income and education—finds that the self-proclaimed happiness of those people being unemployed is much lower than that of employed persons with otherwise similar EMPLOYMENT 97 characteristics. The loss of happiness experienced by unemployment amounts to 0.33 units in the previously mentioned happiness scale, ranging from 1 (“not at all satisfied”) to 4 (“very satisfied”). Our study for Switzerland comes to a very similar result. The results in Table 5.1 show that unemployed people report, on average, a satisfaction level of 6.56 on a 10-point scale, compared to an average score of 8.21 for employed people. Using the ordered probit estimate of the happiness...