Unemployment and Happiness
Fumio Ohtake
Osaka University
Are unemployed people unhappier than employed people? To answer thisquestion, this paper presents an extensive review of previous overseas studies
and conducts an empirical analysis of the determinants of happiness in Japan.
The main result in this study is consistent with that of previous studies; evenwhen the income level and other individual characteristics are held constant,unemployment reduces people’s happiness. This conclusion, if it is true, suggests that under budget constraints, to create jobs rather than to redistributewealth to the unemployed may be more effective to raise people’s levels of
subjective well-being (happiness).

I.

Introduction

Are unemployed people really unhappy? It might be common knowledge that unemployment makes people unhappy. However, according to neoclassical economic point ofview that emphasizes the market equilibrium, unemployment is voluntary. Suppose that thewage flexibly adjust to equilibrate the labor market, people choose to be jobless, rather thanengage in work at a low wage, to find better jobs through ongoing job search activities. If
people choose to leave employment, the voluntarily unemployed people, everything else
being equal, should be happier than the employed as long as they do not work or there
should be no difference in the degree of happiness.
If, on the contrary, the employed are happier than the unemployed, when the income
level and other conditions are held constant, the assumption of neoclassic economics thatpeople become voluntarily unemployed needs to be modified. Even when unemployment isassumed to arise under conditions of downward wage rigidity, the unemployed should be ata higher utility level than the employed. In other words, in case that people with high income are unemployed and people with the same level of income are employed, the utility
level of the unemployed should be higher, as long as labor involves disutility. However, if
being employed provides not only pecuniary benefit but also a sense of happiness to people,
economic policies should be revised accordingly based on such recognition. It implies thatcompensation in money would not increase the levels of subjective well-being of the unemployed, although their income levels reach those of the employed. Under the budget constraints, creating more jobs than compensating the unemployed will be more effective toimprove the level of well-being.
In this regard, for the policy-making as well as economic analysis, studying how unemployment affects people’s happiness is very critical. Then, how can we measure people’s
feeling of subjective well-being, “happiness”? Happiness is usually measured by using datafrom attitude surveys, which typically ask, “Taken all together, to what extent are you cur-

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rently feeling happy?” People’s answers to this question are coded on a 10-point scaleranging from 0 for “very unhappy” and 5 for “neither happy nor unhappy” to 10 for “veryhappy.”
Happiness, an individual’s subjective feeling of well-being, has not been much studied theoretically and examined empirically by economists because of its subjectivity anddifficulty in making comparison between individuals. However, the recent empirical studies
on “happiness” and “satisfaction” have revealed that the effects of personal characteristics
and economic variables on the level of happiness are quite robust and the significant relations are widely recognized in the international academic filed. For example, Frey andStutzer (2002) state that the recent empirical studies on happiness have well proved thatunemployment has a significant negative effect on happiness even when other factors arecontrolled for.1
The effects of unemployment on happiness can be analyzed from two different aspects. One is a personal-level effect that concerns how individuals’ employment state or any
experiences of unemployment affect one’s happiness. The other is a macro-level effect that
focuses on how the macro-level unemployment rate affects the level of happiness. Increasein the macro-level unemployment rate could affect happiness in two ways: (i) as the numberof unemployed people increases, the number of happy people in the entire society decreases; (ii) even for the employed, a rise in the macro-level unemployment rate increases a fearof unemployment, which eventually leads to lowering the level of happiness.
Di Tella, MacCulloch, and Oswald (2001) analyze how the unemployment, the unemployment rate, and the inflation rate affect the level of happiness based on micro data on
happiness for 12 European countries. They argue that everything else same, the unemployed
are less happy than the employed. Clark and Oswald (1994) also conduct an empirical analysis using the UK micro data, and clarify that unemployment significantly reduces people’s
happiness. Wolfers (2003) and Blanchflower and Oswald (2004) find using the US and UK
data that unemployment has a negative effect on happiness.
Earlier studies on the relation between unemployment and happiness may have some
limitations if they are based on cross-sectional data. The negative correlation between unemployment and happiness does not necessarily indicate that unemployment has acause-and-effect relationship with happiness. For example, unhappy people may be more
likely to become unemployed and in this case, the causality runs in the opposite direction.
One possible approach to overcome this problem is to analyze fluctuations in the level ofhappiness of the same individual, or to treat the time invariant happiness level as the fixed
effect. With this method, the adverse relation that people who feel less happy by nature are
more likely to jobless can be explained as the fixed effect. Then, the actual effect of unemployment on happiness can be analyzed. Using the German panel data, Winkelmann and
1

tors.

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Hamermesh (2004) made a critical review of the economic analysis that use subjective indica-

Unemployment and Happiness

Winkelmann (1998) analyze unemployment and its effect on happiness by eliminating the
fixed effects. Their results indicate that even when the fixed effect of individuals is taken
into consideration, unemployment still has a large, negative effect on happiness. In otherwords, the negative correlation between unemployment and happiness is not attributed to
the reverse causality that those who are unhappier than average tend to be easily unemployed; rather, the negative correlation is resulted from the fact that becoming unemployedhas a negative effect on people’s happiness.
Does the effect of unemployment on happiness differ by the circumstances of theunemployed? For example, if people become unemployed in the situation where the unemployment rate is high, and unemployment is a common occurrence or an unusual event, theeffects of unemployment may differ. Many studies in the United Kingdom show that unemployment has a smaller effect on happiness in high unemployment areas than in low employment areas. Clark and Oswald (1994) find that the negative effect size of unemployment on happiness is small among young and elderly people who experience a high unemployment rate, compared with the 30-49 age group who has a low unemployment rate.
However, Winkelmann and Winkelmann (1998) conduct the empirical analysis using German panel data and present a quite different result that young people suffer most from theunemployment and they report the lowest happiness. This remarkable difference may be anindication of the possibility that for some countries, being unemployed at a young age acts
as a permanent shock to the person but not for other countries.2
Di Tella, MacCulloch, and Oswald (2001) and Wolfers (2003) analyze the effect ofthe macro-level unemployment rate on happiness, in addition to the effect of individuals’
unemployment on subjective well-being. They report that a rise in the macro-level unemployment rate reduces individuals’ happiness. The magnitude of the negative effect caused
by increasing unemployment rate at macro level is bigger than that caused by increasing
inflation rate. Wolfer (2003) further discovers that fluctuations in the unemployment rate
also have a negative effect on the level of happiness.3
Comparatively, there have been only few studies on the effect of economic variables
on people’s level of happiness in Japan.4 This paper, in this regard, aims to fill this gab byexamining how unemployment affects individual happiness, using Japanese data. Two setsof data are used for this study. One is the data collected from the Questionnaire Survey on
Lifestyle and Society (2002), conducted independently by the author. This survey investigates the level of happiness of individuals and their employment status. The other is the datafrom the National Survey on Lifestyle Preference (1978-1999), conducted by the Economic
Planning Agency. This survey asks the level of happiness throughout all survey years andalso includes a question on the perceived level of fear of unemployment. The main estimated results based on these two data are: (i) with level of income held constant, the unem2

Korpi (1997) conducted an empirical analysis using data of young people in Sweden.
For macroeconomics and happiness, see Darity and Goldsmith (1996), Oswald (1997).
4
For the study on happiness and inequality, see Ohtake and Tomioka (2002, 2003).
3

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ployed are less happy than those with jobs; (ii) the fear of unemployment reduces people’s
happiness.
Section II explains two data sets used for this study, and Section III reports the resultsof the empirical analysis on the effect of unemployment on happiness. Section IV presents
conclusions and discusses future issues.

II. Data
1. Questionnaire Survey on Lifestyle and Society
The first data used for the analysis of the relation between happiness and unemployment are collected from the Questionnaire Survey on Lifestyle and Society (hereafter,
QSLS) (2002), conducted independently by the author during the period 13-26 February
2002. A sample of 6,000 people aged between 20 and 65 was drawn by two-phase stratified
random sampling. The questionnaires were sent to respondents by mail. The total number of
responses collected was 1,943, among whom 1,928 were valid responses (valid respondent
rate: 32.1%). The questions can be roughly divided into the following categories: (i) Japanese economy (determining factors of income level and normative evaluation thereof, pastand future changes in income distribution, opinions on income redistribution policy); (ii)
respondent’s financial situation (current income, assets, expected income, expected inflation
rate, experience of unemployment, level of happiness, class consciousness); (iii) respondent’s utility function (time preference, risk aversion rate); (iv) other individual characteristics (e.g., gender, age, individual and parental educational attainment).
Studies on the effect of unemployment on happiness using cross-sectional data have
limitations to completely control for personal characteristics, which makes it difficult toeliminate the adverse cause-and-effect relationship between unemployment and happiness.
The analysis using the QSLS may pose the same problem, but the main difference fromprevious studies is that this study adds an indicator for the degree of risk aversion to better
control for individual characteristics.
The degree of risk aversion is constructed by subtracting from 100% the individuals’
responses to the question “When you go out, how high a probability of rainfall makes you
carry an umbrella (0~100%)?”: high values implies a tendency to avoid taking risks. This
indicator is advantageous because it uses the day-to-day situation which is easily understandable for the Japanese respondents and the continuous variable is simply generated fromanswers for the probability of rainfall. The risk aversion measured from the “reservation
price of a hypothetical lottery ticket” may be affected by the respondent’s income level orasset level. If that happens, the degree of aversion with the same risk level may not be accurately measured. Another limitation is that there may be some respondents who have difficulties in making self-assessment of risk attitudes regarding the hypothetical lottery question. The potential problem posed by the rainfall indicator, on the other hand, is that themagnitude of disutility from being caught in a rain may itself vary depending on the res62

Unemployment and Happiness

pondent’s age, gender, income and other individual characteristics. However, in multiple
regression analysis, we can estimate the net effect by controlling for any other factors.

2. National Survey on Lifestyle Preference
Another data used in this paper are collected from the National Survey on Lifestyle
Preference (hereafter NSLP). This survey has been carried out by the Economic Planning
Agency (currently the Cabinet Office) every year, and the survey includes a time-series
component every three years for a chronological comparison. The successive waves of the
NSLP survey with the interval of three years have asked the same question on happiness.
This paper uses individual data from time-series survey collected at 8 points in time between 1978 and 1999. The NSLP has a nationwide sample of both sexes from the age of 15
to 75 drawn by two-phase stratified random sampling and the drop-off survey method isused. The total sample size is 30,007 across the eight successive surveys. In contrast to thecross-section data from the QSLS, the data from the NSLP make it possible to analyze theeffect of changes in the macro-level unemployment rate on happiness. However, it was notpossible to examine the effect of individual unemployment on happiness because the NSLP
does not include questions about a respondent’s job search activities. Instead, this survey
asks, “To what extent are you currently satisfied with the following aspect of your job: workwithout fear of unemployment.” Using this question, how “fear of unemployment” affects
individual happiness can be analyzed. Responses to this question are given in the form of a
5-point rating scale running from “hardly sufficiently satisfied” to “sufficiently satisfied.”
Reported results are converted to a binary variable: those who answered either “not verysatisfied” or “hardly satisfied” are defined as persons who have “fear of unemployment(=1).”

3. Descriptive Statistics
Trends in Time-Series
Figure 1 shows the trend in the mean level of happiness calculated from the NSLP.
The average happiness level declined until 1987, remained nearly flat between 1987 and1996, and then further declined thereafter. The change in unemployment rate shown in Figure 1 corresponds to a slow increase of the percentage of people who have fear of unemployment. The decline in happiness over time and the increase in unemployment rate (fearof unemployment) suggests that there is a negative correlation between happiness and therest of two.

Distribution of the Level of Happiness
The QSLS and the NSLP were conducted by the method of mailing survey andhousehold drop-off survey respectively and obtained different response rates. Due to thesedifferences in survey method and responses rate, two surveys may provide different

63Japan Labor Review, vol. 9, no. 2, Spring 2012

Sources: Level of happiness and fear of unemployment are calculated by the author from the
NSLP and unemployment rate is from the Labor Force Survey.

Figure 1. Level of Happiness, Unemployment Rate, and Fear of Unemployment

distribution of the level of happiness. Figure 2 to 4 enable us to compare the distribution ofhappiness level. Figure 2 and Figure 3 show the distribution of average happiness based on
the QSLS and the NSLP, respectively. Figure 4 shows distributions of happiness level by
successive survey year between 1987 and 1999. Similar patterns in the shape of the distribution of happiness are observed from both surveys. First, the distribution is skewed to theright of the median of “neither happy nor unhappy.” Next, the distribution has two peaks atlevel 5 and level 7-8, while relatively small number of respondents answered level 6. The
QSLS, despite a lower response rate, has a fair number of responses below level 4 or lower,
so it is unlikely that data are too skewed to the responses with higher happiness levels. Figure 4 ensures that these patterns in the shape of distribution are stable over time.

Unemployment and Happiness
Table 1 to 3 report the happiness levels of people who are unemployed, who have ever experienced unemployment, or who currently have fear of unemployment in comparison
with their counterparts. First, Table 1 compares the levels of happiness between the unemployed and the others. Here, happiness levels measured on a 10-point rating scale are divided into three categories: “happy” for level 6 and higher; “unhappy” for level 4 and64

Unemployment and Happiness

Figure 2. Distribution of the Level of Happiness (QSLS)

Figure 3. Distribution of the Level of Happiness (NSLP; 1978-1999)

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Figure 4. Distribution of the Level of Happiness by the Successive Survey Yearbetween 1978 and 1999 (NSLP)

lower; and “neither happy nor unhappy” for level 5. The unemployed are defined as those
who have no job and carry out job search activities. 43% of the unemployed answered thatthey were unhappy, which is in strong contrast to their counterparts; only 8% of the others
answered that they were unhappy. The difference between these two groups is more evident
under the “happy” category. While only 27% of the unemployed answered they were happy,
but more than half of the others answered that they were happy.
Table 2 compares the level of happiness between people who have ever been unemployed for the past five years and the others. Those with the past experience of unemployment account for 20% of all respondents. Their average “unhappy” (23%) is higher thanthose without the unemployment experience (6%), although it is not as high as those whoare currently unemployed (43%). It means people who have ever been unemployed feel
unhappier than those without unemployment experience, but those who feel much unhappier is people who do not have a job now.
The fear of unemployment has a negative effect on the level of happiness (Table 3).
The fear of unemployment is measured from the following question: “There is a possibility
that someone in your family become unemployed in the next two years.” Among those who
responded “yes,” about 16% answered that they were unhappy, while only 5% of people
who responded “no” answered that they were unhappy.
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Table 1. Unemployed People and Their Level of Happiness

Source: QSLS (2002).

Table 2. Experience of Unemployment and Level of Happiness

Source: QSLS (2002).

Table 3. Fear of Unemployment and Level of Happiness

Source: QSLS (2002).

III. Estimation Models and Estimation Results
Unemployment is not the only factor that affects people’s happiness. To see the net
effect of unemployment on happiness, other determinants of happiness are being controlledfor. In this section reports the empirical results of estimating ordered probit equations inwhich individual happiness levels are regressed on unemployment and other individual
characteristics.
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Table 4. Descriptive Statistics from the QSLS

1. Estimation Results Based on the Questionnaire Survey on Lifestyle and Society
Table 4 presents descriptive statistics obtained from the QSLS and Table 5 reports theestimation results for the determinants of happiness. First of all, the effects of individual
characteristics on happiness correspond to those found in the previous overseas studies: (i)those with higher household income and assets are happier; (ii) the level of happiness ishigher among women than men; (iii) the lowest level of happiness is observed amongpeople aged around 40. In addition, the coefficient sizes of woman (=1) and female-headedhousehold (=1) are nearly equal but opposite in sign. This suggests that the happiness levelof women become similar to that of men if the women are the head of household. Secondly,
being unemployed, unemployment experience, and fear of unemployment have substantial
68Unemployment and Happiness

Table 5. Estimation Results Based on the QSLS

Notes: Other explanatory variables include the dummy for the structure of family
who live together.
***: 1%-level of significance.
**: 5%-level of significance.
*: 10%-level of significance.

negative effects on happiness, even when individual characteristics such as household income, gender, and age are being controlled for. These results do not change when expectations about future income growth and the degree of risk aversion are additionally includedin the model. This suggests that even when keeping all economic variables of the incomechange rate, household income and assets held constant, the unemployment, experiences of
unemployment, and fear of unemployment significantly reduce people’s happiness. Thirdly,
those with the high degree of risk aversion feel less happy. This result can be interpreted ina way that under the same uncertainty, risk-averse people may feel unhappy.

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2. Estimated Results Based on the National Survey on Lifestyle Preference
Table 6 and Table 7 report descriptive statistics of the NSLP data and estimation results, respectively. As explained in the section 2-2, the NSLP data do not include a question
as to whether the subjects are currently unemployed or not. Thus, with the NSLP data, thisstudy analyzes the effect of the “fear” of unemployment, instead of “being” currently employed, on happiness.
Main estimation results are as follows (Table 7). First, in Model 1, the effects of income, age, and gender on happiness are qualitatively the same as those found with the
QSLS data. High-income earners, women, the highly-educated report higher level of happiness, while those aged around 40 report the lowest level of happiness. In addition, therecent decline in the level of happiness, with income and age held constant, is observed
from the movements of year dummy variables in Model 1.
Model 2 indicates that people’s levels of happiness significantly declines if they havefear of unemployment or they think that equality of income and property has not beenachieved. In particular, the negative effect of the fear of unemployment on happiness remains significant even when household income level or the expectation for income growthis being controlled for. In other words, even when people have high income or expect thecontinuous income growth, their happiness declines if they are aware that there is fear of
unemployment in society. If people think that inflation will rise, it also has a negative effecton happiness. In contrast, those who are healthy and have less stress in life feel happier.
When these self-consciousness variables included into the model, the decline in the coefficient sizes for year dummies are reduced by about 0.1 point. This suggests that the cause of
the recent decline in the level of happiness can be partly accounted for by the increase in thefear of unemployment or sense of inequality.5 After self-consciousness variables are being
controlled for, however, the declines in coefficient sizes of the recent year dummies are stillobserved. This might indicate that other important variables are also important in explaining
declines in happiness of the Japanese.
In Model 3, the unemployment rate replaces year dummies as an additional explanatory variable. Even though the results should be interpreted with caution because the data
were collected only at eight points in time, it is found that the rise in the unemployment rate
has a negative effect on the level of happiness. Model 4 includes quadratic time trends in the
inflation rate and unemployment rate. The quadratic terms of unemployment rate and inflation rate are both negative. The peak of happiness occurs at 4.5% of the unemployment rateand 3.3% of the inflation rate. This suggests that the level of happiness will decline if theunemployment rate rises from the 2003 level, whereas the rise in the inflation rate up to
3.3% will raise the level of happiness. This interpretation still requires caution because theempirical results are based on limited time-series data.
5

When both independent (happiness level) and dependent variables (the sense of inequality or fearof unemployment) are self-consciousness variables, there may be a potential cause-effect specification
problem .

70Unemployment and Happiness

Table 6. Descriptive Statistics Based on the NSLP

Fear of unemployment: in response to the question “To what extent are you currently satisfied with the following aspect of your job: work without fear of unemployment?,” those who answered either “hardly satisfied” or “not very satisfied.”
Sense of inequality: in response to the question “To what extent are you currently
satisfied with the following statement: there is not much inequality in terms ofincome or property?,” those who answered either “hardly satisfied” or “not verysatisfied.”
Income growth: In response to the question “To what extent are you currently satisfied with the following statement: your income “certainly” increases every
year?,” those who answered either “nearly satisfied” or “somewhat satisfied.”
Inflation: In response to the question of “To what extent are you currently satisfied
with the following statement: your income or property does not decrease in value due to an inflation?,” those who answered either “hardly satisfied” or“somewhat unsatisfied.”
Health: In response to the question of “To what extent are you currently satisfied
with the following statement: you attempt to maintain or improve your health?,”those who answered either “nearly satisfied” or “somewhat satisfied.”
Stress: In response to the question of “To what extent are you currently satisfied
with the following statement: you do not suffer much mental strain, e.g., irritation, stress?,” those who answered either “hardly satisfied” or “somewhat unsatisfied.”71

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Table 7. Determining Factors of Happiness, Based on the NSLP

Note: ***: 1%-level of significance.
**: 5%-level of significance.

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Unemployment and Happiness

IV. Conclusion
This paper empirically analyzes what determines the level of happiness with particular focus on the effect of unemployment, using the individual data obtained from the QSLS
and the NSLP. The main finding from the empirical analysis is that being unemployed, experiences of unemployment and fear of unemployment reduce people’s happiness. Thismight appear to be common knowledge, but it should be noted that the same results are obtained when the income level is being controlled for in the analysis. In other words, evenwith the same income, those who are currently looking for jobs are less happy than those
who are engaged in their jobs. The analysis also reveals that people who have a high degreeof risk aversion and who recognize income inequality feel less happy. The level of happiness of the Japanese substantially declined in late 1980s, which can be partly accounted forby the growing fear of unemployment and increasing degree of inequality.
Based on the results of the empirical analysis, this study concludes that in order toraise people’s level of subjective well-being (happiness), it is more effective to spend budget in creating jobs than to redistribute the budget to the unemployed.

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