Empirical Project 8 Measuring the non-monetary cost of unemployment

Learning objectives

In this project you will:

Key concepts

  • Concepts needed for this project: mean, standard deviation, range, percentile, correlation, correlation coefficient, confidence interval, and statistical significance.
  • Concepts introduced in this project: confidence interval for the difference in means.


CORE projects

This empirical project is related to material in:

Hiring employees is different from buying watermelons (discussed in Empirical Project 7) or other goods and services. The reason is that the employer cannot write an enforceable employment contract that pins down exactly the tasks the worker must perform—how much effort to exert—in order to get paid. You can read more about how firms set wages and why employment contracts are different from purchase contracts for goods and services in Sections 6.4 and 6.5 of Economy, Society, and Public Policy.

Although the level of effort cannot be specified precisely in the employment contract, there are many reasons why people choose to work hard and exert effort in their jobs, even if it can be mentally and physically exhausting to do so. For example, people may find working hard and doing a good job rewarding in itself, or they may feel a sense of responsibility for other workers in their team or to their employer. Another reason is the fear of being fired or not being promoted to a position that would give them higher pay and greater job security. Workers would not want to lose their jobs if they could not immediately get another job under the same wage and working conditions. There are therefore both benefits and costs to working. The difference (benefits minus costs) is known as the ‘employment rent’, which is positive for everyone who chooses to work. This means that it is costly to lose your job.

The employment rent takes into account both monetary and non-monetary costs and benefits. For example, being employed could give utility through social status and conformity to the social norm of having a job; being unemployed may be psychologically and financially detrimental, owing to the stress of looking for a new job and not meeting the social norms and expectations regarding work. If societies have a conviction that able people of a working age should be working, then being unemployed could result in a fear of being stigmatized, a sense of shame from being unemployed, and feeling inferior to others who are employed, all of which would reduce an individual’s utility and life satisfaction.

Disutility from unemployment is a concept that we cannot measure directly, so instead we will use self-reported wellbeing. This measure has its limitations but is widely used to quantify costs that we cannot observe, such as the effect of becoming chronically ill or other life-changing events.

To read the complete study ‘Employment status and subjective well-being’, ask your university about institutional access to Sage journals.

We will be using an approach and data that is similar to the study ‘Employment status and subjective well-being’, which used the European Values Study (EVS), a cross-country survey, to investigate the differences in life satisfaction between people of different employment statuses. The hypothesis was that unemployed people would on average be less satisfied with life than employed people, and that this relationship between employment status and wellbeing would vary depending on social norms.

As discussed earlier, one explanation for a relationship between employment status and reported wellbeing is social norms regarding a work ethic. If social norms are an important determinant of wellbeing, then we expect the gap in wellbeing between employed and unemployed to be larger in countries with a stronger self-reported work ethic.

While the main focus of this project is on the (full-time) employed and the unemployed, we will also consider whether wellbeing differs for other employment statuses, such as being retired. Expectations to work may not be as strong for the elderly, so the lack of formal employment would have less of an effect on wellbeing compared with working-age people who are unemployed.

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