The Effect of Unemployment on Life Satisfaction: A Cross-National Comparison Between Canada, Germany, the United Kingdom and the United States

The Effect of Unemployment on Life Satisfaction: A Cross-National Comparison Between Canada, Germany, the United Kingdom and the United States. Wen-Hao Chen, Feng Hou. Applied Research in Quality of Life, September 2019, Volume 14, Issue 4, pp 1035–1058. https://link.springer.com/article/10.1007/s11482-018-9638-8

Abstract: This paper investigates the effect of unemployment on life satisfaction from a comparative perspective. It also tests whether the link between unemployment and life satisfaction is moderated or reinforced by contextual unemployment across regions within a country—either through a negative spillover or a positive social-norm effect, or both. The results suggest that noticeable non-pecuniary costs are associated with unemployment in the four countries studied. Cross-national differences also emerged in the impact of the moderating factors. Regional unemployment is a strong moderating factor of own unemployment in Canada and to a lesser extent in the United States; the effect is ambiguous in the United Kingdom and exacerbating in Germany. The results also support a negative spillover effect of regional unemployment on the employed in the United States and Germany, no spillover effect in the United Kingdom and, surprisingly, a positive overall spillover effect in Canada. Sensitivity testing further revealed that this Canadian anomaly was a phenomenon mainly in Atlantic Canada, not across the whole country.

Keywords: Unemployment Subjective well-being Employment insecurity Social norm


Cross-National Differences and Possible Explanations
The results reveal some interesting cross-country similarities and differences in the well-being of the employed and the unemployed among the four countries studied. In all cases, noticeable non-pecuniary costs are associated with unemployment, net of observable characteristics. Unemployed Canadians, like the unemployed in the other countries, tend to have lower levels of life satisfaction than the employed, witheverything else held equal. The estimated employed–unemployed life satisfaction gap looks remarkably similar in Canada, the United States and the United Kingdom. It is significantly wider in Germany.

This overall pattern is consistent withour prior expectation that the negativeeffect of own unemployment on life satisfaction is exacerbated in countries where employment protection legislation (EPL) is strict. Empirical studies often find that strict EPL negatively affects unemployment inflow and outflow,because stricter EPL entails higher firing costs and reduces the propensity tohire by employers (for a review, see OECD2013). The differences in EPL among the four countries (over their respective sample periods) reported inTable5 support this claim. Germany had relatively more stringent EPL againstdismissals for regular and temporary workers than, in order, the United Kingdom, Canada and the United States.

Job Security and Prospects
The other possible explanation for the wide employed–unemployed life satisfaction gapin Germany is labour market security and prospects. Knabe and Ratzel (2011) showed that individuals’ perceptions of labour market risk have a greater impact on their well-being than their employment status. Clark et al. (2010) divided sample in the labourforce into four mutually exclusive groups according to their job security and prospects. They found that the employed with high job security had the highest life satisfaction, while the unemployed with poor job prospects had the lowest life satisfaction. Interestingly, the average life satisfaction of the insecurely employed and of the unemployed with good job prospects is similar. The wide employed–unemployed life satisfactiongap in Germany may indicate a polarized labour market, where the employed are secure and the unemployed have poor job prospects (as a result of, for instance, significantentry or re-entry barriers).

The summary labour market and institution indicators for the four countries reported in Table5 were used to determine whether the labour market in Germanyis polarized.23The results support the idea of a polarization between job security and job prospects in the German labour market. Germany stands out as having the lowest incidence of short job tenures, as well as the highest incidence of long job tenures, among the four countries. Over the study period, nearly 60% of German employees had five years or more of tenure with their current employer. Only 46%to 48% of employees in the three other countries had five years of more of tenure with their current employers over their corresponding periods. The employee turnover rate was lower in Germany: only about 15% of employees experienced a short job tenure of less than a year, versus 20% or more of employees in thethree other countries. These results suggest that German employees are relatively more secure in their jobs. Table 5 also confirms that prospects for job seekers are relatively gloomy in Germany: over 50% of the unemployed were out of work longer than one year. The long-term unemployment rates are much lower in thethree other countries, at 12%for Canada, 15% for the United States and 27% United Kingdom. This also explains why unemployed Germans had significantly lower predicted life satisfaction scores (see Section 4.3) than their otherwise-equal counterparts in other countries.