You're Fired! The Causal Negative Effect of Unemployment on Life Satisfaction

This paper examines the impact of unemployment on life satisfaction for Germany 1984-2006, using a sample of men and women from the German Socio- Economic Panel (SOEP). Across the board we nd large signicant negative eects for unemployment on life satisfaction. This paper expands on previous cornerstone research from Winkelmann and Winkelmann (1998) and explicitly identies truly exogenous unemployment entries starting from 1991. We nd that for women in East and West Germany, company closures in the year of entry into unemployment produce strongly negative eects on life satisfaction over and above an overall eect of unemployment, providing prima facie evidence of a reduced outside work option, large investments in rm-specic human capital or a family constraint. The compen- sating variation in terms of income is dramatic, indicating enormous non-pecuniary negative eects of exogenous unemployment due to company closures.