Unemployment and Wellbeing

Losing a job means losing income, and that alone can be very hard. But one of the most consistent findings in wellbeing research is that unemployment lowers life satisfaction far more than the drop in income can explain. Economists call these extra harms the non-pecuniary costs of unemployment - costs that are not about money.

More than a lost paycheck

In the 1990s, economists Andrew Clark and Andrew Oswald, studying British survey data, found that unemployment was associated with one of the largest drops in life satisfaction of any common life event. Many later studies across Europe, North America and elsewhere have confirmed this. When researchers compare unemployed people with employed people who have similar incomes, the unemployed are still considerably less satisfied with their lives. Estimates vary, but several studies suggest the non-money harm of unemployment is larger than the harm from the lost income itself.

What work provides besides pay

A famous study from the 1930s helps explain why. Researchers led by Marie Jahoda studied Marienthal, a village in Austria where almost everyone lost their jobs when the local factory closed. Jahoda later described what she called the latent functions of work - the hidden benefits a job provides besides wages. These include a structure for the day, regular contact with people outside the family, a sense of shared purpose, social status and identity, and regular activity. When work disappeared, many people in Marienthal lost these too, and life became aimless even when basic needs were met.

Lasting scars

Unemployment’s effects can also persist after a new job is found. Research following the same people over many years finds that people tend to adapt only partly to being unemployed, and that past unemployment can leave a scarring effect: lower wages, greater worry about job security, and somewhat lower wellbeing for years afterward. Long spells of unemployment early in a career appear especially damaging.

Unemployment also affects people who keep their jobs. When unemployment rises in a region, even employed people report lower wellbeing, likely because they fear losing their own jobs.

The social norm effect

Interestingly, some research, notably by Andrew Clark, suggests that unemployment hurts somewhat less where it is more common, because there is less stigma and people are not singled out. This social norm effect shows how strongly the meaning attached to work shapes wellbeing.

Implications for policy

These findings suggest that policies should aim not only to replace income but also to help people back into meaningful activity: job search support, retraining, community programmes and volunteering. It also strengthens the case for treating low unemployment as a central goal of economic policy, and for reducing stigma so that people who lose work are supported rather than blamed.