# **2 Literature Review**

This section reviews the literature on subjective well-being (SWB) and labor market status. It summarizes two main findings, both relevant for the present thesis. The first finding is that individuals’ happiness is affected by their employment status. Those who lose their job feel significantly worse than when employed, far worse than their income loss would predict<sup>1</sup> . The second finding is that aggregate unemployment is also affecting individuals. There is a so called ”Social Norm” effect of unemployment, through which unemployed feel less hurt the higher the unemployment is in their reference group. Unemployment also affects those who are employed, although contradictory effects are found in the literature<sup>2</sup> . Based on these findings, this section presents the possibility that the social norm effect from unemployment might affect the search behaviour and the duration of unemployment. It then asks what policy questions arise.

## **2.1 Subjective Well-Being and Labor Market Status**

A large stream of research has been interested in the relationship between subjective wellbeing and labor market status. The social psychology literature precedes economics in this field. The idea conveyed in most of the works is that there are many non-pecuniary benefits from working. Unemployment deprives the former workers from latent functions such as social interactions, purposefulness, a time structure and a certain construction of identity (Jahoda, 1982). Hence, unemployed are worse off not just because of the loss of their wage income<sup>3</sup> . Earlier empirical work by Jackson, Stafford and Warr (1983) shows that well-being rises with the transition from unemployment to paid work. Although the sample used is not representative of the population, it is useful at highlighting the effect of transitions on happiness. Darity and Goldsmith (1996) provide an extensive summary of the social psychology literature on unemployment.

Empirical work from economists testing this view has been conducted since the early 1990s, when data on SWB became available through national household surveys including a section on well-being. Clark and Oswald (1994) use the first wave of the BHPS to find that unemployed are, on a raw average, half as happy as the employed. This result is corroborated by the studies of Korpi (1997), who uses Swedish data, Winkelmann and Winkelmann (1998), who use the German GSOEP, Woittiez and Theeuves (1998) who have Dutch data, and Frey and Stutzer (2000) who use a Swiss household survey. Data on other countries have also been available through the World Values Surveys (WVS) and through

> 1Clark (1998) finds that the income loss from losing a job explains only a quarter of the drop in well-being

> 2Di Tella _et al_ , (2001) find that unemployment negatively affects SWB (in developed countries), whereas Eggers _et al_ (2006) find a positive effect using Russian data.

> 3Proponents of this idea highlight the negative psychological impact of being unemployed. Summaries of the literature can be found in Fryer and Payne (1986), Warr _et al_ (1988), Feather (1990), Burchell (1992), Murphy and Athanasou (1999). Argyle (1989) is a reference book in social psychology with an extensive chapter on the GHQ measure and another one on unemployment

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