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

Andreas Knabe and Steffen Rätzel

No 7012, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: Unemployment causes significant losses in the quality of life. In addition to reducing individual income, it also creates non-pecuniary, psychological costs. We quantify these non-pecuniary 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, without this distinction, the non-pecuniary costs of unemployment are overestimated by roughly one-third. Nevertheless, the non-pecuniary costs of unemployment with this modified quantification method still amount to 2.3 (1.5) times the pure pecuniary costs of unemployment for men (women).This confirms the high value of work for life satisfaction.

Keywords: unemployment; happiness; life satisfaction; permanent income (search for similar items in EconPapers)
JEL-codes: D91 J28 J60 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2007-05
New Economics Papers: this item is included in nep-hap
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Quantifying the psychological costs of unemployment: the role of permanent income (2011)
Working Paper: Quantifying the Psychological Costs of Unemployment: The Role of Permanent Income (2007)
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