Are European leaders aware of the miseries of mass unemployment?

From: Henk de Vos (guest post)

Unemployment in Europe is at record levels and rising. Five European leaders (Dijsselbloem, Rehn, Asmussen, Regling and Hoyer) declared in The New York Times (April 17) that their current policies of austerity bring:

serious social challenges, notably in the form of unacceptably high unemployment. These challenges have to be addressed with determination.

But there is awfully little to find in their policies that is reassuring to those who suffer being unemployed, often for years in a row, or to the increasing number of employed who face the prospect of job loss. And the policies that the leaders bring forward as their response to the crisis, do not indicate a deep awareness of the disastrous psychological, social and economic consequences of unemployment. It seems that full employment, that used to be one of the main macro-economic policy goals, has completely disappeared behind the priorities of low inflation and balanced budgets. The latter are considered to be essential because of confidence effects. But what are the confidence effects of mass unemployment? Questions about psychological well-being are often included in general purpose household surveys, in particular the question “How satisfied are you at present with your life as a whole?” Winkelmann and Winkelmann (1998) used evidence from panel data to show that unemployment has a large detrimental effect on satisfaction after individual specific effects are controlled for. The effect of unemployment is large: almost three times larger than the effect of bad health. And it is unrelated to unemployment duration; the long-term unemployed do not get used to their situation.  These non-pecuniary costs by far exceed the pecuniary costs associated with loss of income while unemployed. This large decrease in satisfaction must have a significant impact on general optimism and confidence.

Lucas, Clark, Georgellis and Diener (2004) also found, in a 15-year longitudinal study, that unemployed people did not completely return to their former levels of satisfaction, even after they became reemployed.  And Clark, Georgellis and Sanfey (2000) showed that having been unemployed even inflicts a permanent damage to life satisfaction; the “scarring” effect of unemployment. Knabe and Rätzel (2008) Knabe and Rätzel explain  this effect as a consequence of the increased fear of future job loss caused by having been unemployed. Once you have experienced job-loss, you suffer from more unfavourable expectations about the future and this has a strong impact on life satisfaction. And this also holds for employed persons: with a risky job you are significantly unhappier than if you were more securely employed. Knabe and Rätzel conclude that unemployment is not “scarring”, but “scaring”. So by tolerating mass unemployment, policy makers create a large loss of confidence in the general population.

And this loss is not restricted to the labour force. For a complete picture you of course should also look at how family members of the unemployed are affected. Gregg, MacMillan and Nasim (2012) showed that children of fathers who lost their job or were displaced in the recession of the 80s in the UK, did significantly worse in terms of their GCSE attainment, the equivalent of about 2 per cent lower wages as an adult. And this negative effect was probably caused by father’s unemployment, instead of being an effect of unobserved characteristics affecting educational attainment. Father’s job loss or displacement also raised the child’s exposure to youth unemployment. The authors suggest that the current recession in the UK may have significant long-term consequences for the educational and occupational careers of the children of those who lost their jobs.

Of course you could argue that these miseries are unavoidable, because the alternatives would be even worse. But if such an alternative would be to have a higher rate of inflation for some period, in order to stimulate demand, than the evidence points to larger negative well-being effects of unemployment than inflation. Blanchflower, Bell, Montagnoli and Moro (2013) estimate the unemployment/inflation trade-off of Well-being as approximately 3.8. So a 1 percentage point increase in unemployment lowers well-being nearly four times more than an equivalent rise in inflation. Unemployment hurts more than inflation does.