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A Pecuniary Explanation for the Heterogeneous Effects of Unemployment on Happiness


Why unemployment has heterogeneous effects on subjective well-being remains a hot topic. Using German Socio-Economic Panel data, this paper finds significant heterogeneity using different material deprivation measures. Unemployed individuals who do not suffer from material deprivation may not experience a life satisfaction decrease and may even experience a life satisfaction increase. Policy implications for taxation and unemployment insurance are discussed.

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Fig. 1


  1. 1.

    In this paper SWB, happiness, and life satisfaction are used interchangeably.

  2. 2.

    See also Luo (2019a).

  3. 3.

    The value of labor income among the unemployed is − 2 (does not apply) and is reset to 1.

  4. 4.

    The equivalent household income is defined as household income divided by the square root of the household size. Rich is defined as an equivalent household income greater than 1.5 times the average equivalent income.

  5. 5.

    Smith and Razzell (1975) also find that lottery winners choose not to work because their labor income faces a high marginal tax rate due to their large capital income derived from investment. Thus, labor income and other sources of income should be taxed separately.


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I am indebted to Neel Rao for his helpful advice. I am grateful to the editors Talita Greyling and Stephanie Rossouw and two anonymous referees for valuable comments. I thank Alex Anas, Jinquan Gong, Zhiqiang Liu, and Peter Morgan for their suggestions. The data used in this publication, the German Socio-Economic Panel Study (SOEP), were made available by the German Institute for Economic Research (DIW), Berlin. I thank the people from DIW for their help in accessing and interpreting the data.

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Correspondence to Jianbo Luo.

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Appendix: Definitions of the Variables

Appendix: Definitions of the Variables

Life Satisfaction: How satisfied are you with your life, all things considered? Please answer on a scale from 0 to 10. [0] for completely dissatisfied and [10] for completely satisfied.

Monthly Net Income: The net monthly income of all of the members of your household. In other words, the income after deductions for taxes and social security, including regular income such as pensions, housing allowances, child benefits, grants for higher education, maintenance payments, etc.

Minimum Required Income: What would you personally consider the minimum net household income to be that you would need in your current living situation? We are referring here to the net monthly income that your household would need to get by.

Financial/Environment Satisfaction: How satisfied are you today with the following areas of your life? Your household income/The environmental conditions in your area. [0] for completely dissatisfied and [10] for completely satisfied.

Economic/Environment Concerns: How concerned are you about the following issues? Your own economic situation/Environmental protection. [1] for very concerned, [2] for somewhat concerned, and [3] for not concerned at all.

Labor Income: What did you earn from your work last month? Please state your net income, which is your income after the deduction of taxes, social security, unemployment and health insurance.

Household Asset Income: Asset flows include income from interest, dividends, and rent.

What do you consider good or bad income in relation to your personal living conditions and living standards? In each case, please state your net household income per month: a very bad income; a bad income; a somewhat inadequate income; a barely adequate income; a good income; a very good income.

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Luo, J. A Pecuniary Explanation for the Heterogeneous Effects of Unemployment on Happiness. J Happiness Stud (2019). https://doi.org/10.1007/s10902-019-00198-4

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  • Unemployment
  • Subjective well-being
  • Heterogeneity
  • Material deprivation
  • Minimum required income

JEL Classification

  • D6
  • I3
  • J6