Getting a Job, Again: New Evidence against Subjective Well-Being Scarring

Abstract

Previous research finds that unemployment leaves permanent “scars” on subjective well-being (SWB) that remain even after reemployment. However, this research systematically overweighs long-term unemployment, inaccurately measures employment transitions, often does not track individuals long enough to substantiate scarring, and does not always account for age-related changes in well-being. This paper uses event history calendars from the Panel Study of Income Dynamics to track complete monthly employment histories of prime working age Americans over a 17-year period, and accounts for the temporal relationships between SWB, age, and employment transitions using a novel fixed-effects formulation. The results suggest that there is some variation in patterns of recovery by employment stability after job loss, but no significant differences were observed by the duration of unemployment spells. Within 2 years of reemployment, average SWB levels reverted toward baseline trajectories across all groups, showing no evidence of scarring. This study brings unemployment literature into better alignment with research on resilience and adaptation. The findings also highlight some limitations of the construct of SWB for assessing the long-term costs of unemployment.

Subjective well-being scarring through unemployment: New evidence from a long-running panel

“…Furthermore, Clark et al (2008) report a somewhat stronger effect for men in the adaptation of well-being to being unemployed, but the estimates do not differ significantly by gender. Last, Rauf (2020) finds no gender differences in the reaction to unemployment.…”

“…Kessler et al 1989;Warr and Jackson 1985), methodological problems concerning causal inference have led many scholars to the conclusion that these cross-sectional studies provide biased estimates of scarring effects. Only recently has Rauf (2020) provided convincing empirical evidence against SWB scarring for the U.S. using the Panel Study of Income Dynamics (PSID). Based on fine-grained monthly measures of unemployment duration and a strong research design that controls for both unobserved heterogeneity and group-specific age trends (time-distributed fixed effects model with group-specific slopes; FEGS), she finds no evidence of reduced SWB levels within 2 years of reemployment.…”

“…Based on fine-grained monthly measures of unemployment duration and a strong research design that controls for both unobserved heterogeneity and group-specific age trends (time-distributed fixed effects model with group-specific slopes; FEGS), she finds no evidence of reduced SWB levels within 2 years of reemployment. Rauf (2020) thus builts a strong case against enduring SWB scarring through unemployment.…”

“…However, it remains an open question whether her finding of only temporary bruises instead of lasting scars for the U.S. can be generalized to other contexts and which mechanisms drive these effects. Therefore, we decided to apply the rigorous analytic approach proposed by Rauf (2020) to replicate previous results on SWB scarring for a different context. We theorize that unemployment can have an enduring impact mainly through the experience of unemployment as an incisive life event and unemployment as a driver of future unemployment.…”

“…Given these institutional differences between Germany and the U.S., one would expect "deeper" scars for the U.S. Thus, if Rauf (2020) does not find evidence for SWB scarring in the more favorable U.S. setting, it is even less likely to do so for Germany using TD-FEGS.…”