4. RECESSIONS UNEMPLOYMENT AND INFLATION
Endowment effect
people value things more when they already possess them
knetsch mug and chocolate
t1- given mug option to trade for candy
t2- given candy option to trade for mug
t3- choose between mug and candy
found 56% in t3 chose mug over candy but only 10% in t2 would trade
loss aversion
explains for the endowment effect
people respond differently to gains and losses with losses impacting people more then gains of the equivalent magnitude
people are loss averse on happiness of recessions maybe greater then the effects of positive growth
SWB and the boom burst cycle
LS is procyclical but LT changes in LS is unrelated to economic growth rate
looking at volidility this can explain why countries with similar economic growth experience different trends in life satisfaction
deneve et al 2018
data on individual SWB from GWP eurobarometer, behavioural risk factor surveillance system, for each data set they regressed SWB against positive and negative economic growth
they found that 10% recession leads to 0.135 SD fall in dependent variable
futher regressions found large negative effect of unemploymet
boom and burst cycle has potential to eradiacte SWB from LT growth
they were unable to fully identify why effects of negative growth were so strong, only partly due to high unemployment, or prehaps psycholigical effects
unemployment
there is a negative relationship between unemployment rate and SWB, unemployed have lower SWB then employed of same age and gender
standard economic theory suggests people get disutility from work but if you loose your job you loose income but gain leisure
clark et al contorlling for income found unemployment still had a negative impact on SWB partly due to
loss of sense of purpose and contribution
social status
self esteem
community and identity
anxiety about the future
lack of routine
health
luechinger et al 2010 found a larger effect of unemployment rate on SWB of private sector employees then public sector employees due to security
unemployment vs inflation
traditionaly there is a trade off but what is the optimal trade off?
happiness economcis looks at the combination of unemployment and inflation that maximises SWB
blanchflower et al
looks at european data set regression with individual SWB as dependent variable and independent varibles being current inflation rate, unemployment rate, controls for country year and individual characteristics and economic growth rate
they found that high inflation has a negative effect on countries average SWB but effects are small comapred to unemployment
a 1% change in unemployment has a 5% change in inflation
but monetary policy prioritises inflation too much