Reference-Dependent Effects of Unemployment on Mental Well-Being

Martina Grunow

No 323, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: Several contributions to the literature have shown that the perception of the individual employment status depends on the surrounding unemployment rate. We argue that expectations are a possible link between unemployment rates and the individual employment status regarding changes in mental well-being. Theoretical foundation comes from models for reference-dependent preferences with endogenous reference points. We provide a simple theoretical model to motivate and structure the empirical analysis. Using data from the German Socio-Economic Panel, we estimate a pairwise interacted model for employment status and expectations over two time periods. Life satisfaction is used as a proxy for mental well-being. To identify a causal effect of unemployment, expectations and their interactions on mental well-being, the analysis relies on fixed effects and exogenous entries into unemployment due to plant closures. We confirm the standard result that unemployment has a negative effect on mental well-being. Furthermore, the results deliver empirical evidence for reference-dependent effects of unemployment on mental well-being. We find that becoming unemployed unexpectedly is more severe as if the unemployment was expected. Therefore, this paper contributes to the understanding of how mental well-being is affected by unemployment and delivers empirical support for the theoretical models of reference-dependent preference wit endogenous reference points determined by expectations.

Keywords: Subjective Well-Being; Unemployment; Reference-Dependence; Reference Points (search for similar items in EconPapers)
JEL-codes: C23 D03 D84 I10 I18 J01 J60 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-hap, nep-hea and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Reference-Dependent Effects of Unemployment on Mental Well-Being (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:aug:augsbe:0323

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