How can government protect society from the trauma of unemployment?

A long road back to mental health.
A long road back to mental health.
Image: Reuters/Bryan Woolston
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Unemployment hurts, and it’s not just about the money.

“Whichever data you look at, especially in the Western world, unemployed people are extremely dissatisfied with their lives—really, really dissatisfied with their lives,” said Nattavudh Powdthavee, professor of behavioral science at Warwick Business School. “It’s one of the biggest negative things that can happen in someone’s life.”

Powdthavee says the loss of income only explains about 20% of the decline in well being. The hit to social status, self-esteem, and the fear about losing future income pack a bigger emotional punch than the financial damage itself. And the psychological fallout tends to drag on even after the person is making money again, according to research by Jennie Brand, a professor of sociology and statistics at the University of California, Los Angeles.

With a surge in unemployment across the world caused by Covid-19, it’s critical that policies consider the emotional pain of unemployment. Behavioral research signals that European-style programs could be better at mitigating the trauma of job loss. These policies provide money to companies to keep workers on the payroll. For example, Germany’s Kurzarbeit, which translates to “short-time work,” allows financially distressed employers to cut worker hours, and the government pays for most of the lost wages. In contrast, US-style efforts provide payments directly to people who have lost their jobs.

Policies that take into account emotional wellness could help society in a number of ways, from buttressing families to keeping groups of people from feeling marginalized and left behind.

Part time is better than no time

All support systems have drawbacks. The furloughs and short-time work programs offered in Europe are expensive and risk propping up companies that aren’t viable any longer. While the US system is more flexible and can help the economy adapt, it also can be wasteful if it means companies will have to work hard to find a new crop of employees when sales are on the upswing again.

And then there’s the emotional fallout.

When it comes to emotional wellbeing, a job is probably a better solution than an unemployment check. But even then, there are nuances.

“The balance of the evidence is that part-time work is better than no work,” said Andrew Oswald, a professor of economics and behavioral science at the University of Warwick. “Broadly speaking, we do know that people prefer wages cuts when it comes to it, if that’s necessary to save their jobs. Nobody wants part-time work if they have been full-time. But the worst thing is to be fully unemployed.”


One way to let people do at least some work during a downturn is through a program like Germany’s Kurzarbeit, which is among the oldest and best known short-time work programs. In response to Covid-19, Germany expanded access to Kurzarbeit so companies can apply when 10% of their employees have reduced hours, down from the previous 30% threshold.

Kurzarbeit wasn’t designed to reduce stress, per se. The system goes back to the 1970s, when Germany was threatened with widespread layoffs resulting from the oil crisis, according to Eric Thode, director at nonprofit foundation Bertelsmann Stiftung. “It was created in a such a way as to account for the wish of job security,” he said. “It then subsequently also shapes the preferences of workers.”

These days, Kurzarbeit is also seen as a way to help with the worry that some groups are being left behind in the modern economy. “Social cohesion is a big topic in Germany right now,” Thode said. “When you have a growing proportion of people being discontent and thinking they have been left behind, then of course parties on the far political right will rise.”

As pandemic stress mounts, last month Germany extended its short-time work program for another year, providing additional support to workers and companies until the end of 2021. Finance minister Olaf Scholz has called it the country’s “greatest economic and socio-political act.”

Others in Germany are more skeptical. Deutsche Bank CEO Christian Sewing has warned that state aid will make European companies less competitive, setting them up to fall behind their American peers when the pandemic finally subsides. Jens Weidmann, an uber hawk and the head of Germany’s central bank, has also cautioned that government largess could end up protecting obsolete businesses.

Big league happiness

There’s a case to be made that the US system could deliver a higher-performing economy in the end, which could boost human welfare in its own way. Government policies shouldn’t subsidize companies that could be failing, the thinking goes, because it makes the system less efficient. An alternative is to set conditions that will generate more profitable companies that can hire more people, pay them higher wages, and offer roles that are more satisfying.

Likewise, a smaller safety net means unemployed workers may be more energetic when it comes to finding new roles, speeding up the flow of talent from weak companies and industries to more dynamic ones.

Oswald says there’s some truth to that argument—indeed, over the years, the US unemployment rate has tended be lower than the EU’s—but his research indicates that it may not result in a happier, more fulfilled society. “The evidence is that that’s not what produces the highest welfare in an economy, the highest level of wellbeing in an economy,” he says. He argues that a strong social safety net, like those available in Scandinavian countries, can result in more contentment.

“My sense is that the efficiency argument has won the day too much,” he says. “If you look at the data on happiness and mental health across the world, [the US doesn’t] come out on top.”

The World Happiness Report

Even a robust safety net for workers doesn’t guarantee a happy society though, at least according to rankings in the World Happiness Report, which considers variables like GDP-per-capita, freedom to make life choices, and perceptions of corruption. While the US is ranked behind all of the  Scandinavian countries, it is ahead of European countries like France (No. 24) and Spain (No. 30), which have extensive protections and support for workers.

It’s possible to overstate human frailty. Most people don’t like stress, but people tend to be hardy and adaptable even in difficult situations, which we all inevitably face.

However, there’s a difference between short-term stress and ongoing anxiety, which could have a deeper effect on health and mental wellbeing. “Stress is natural, and feeling anxious is part of life and we are quite resilient to that,” Powdthavee said. “We’re trying to minimize it, to find an optimal path.”

High performing and happy

The longer people are unemployed, the more likely they are to stay unemployed, according to the Institute for Research on Labor and Employment.

Meanwhile, Brand’s research at UCLA indicates that unemployment can damage the fabric that holds families together and result in worsening educational outcomes for children, in addition to a drop in psychological and physical wellbeing. It’s not a stretch to expect that the damage to health and families will eventually show up in the economic data.

Put another way, an economy made of people who have been less stressed out by the trauma of unemployment may also perform better. Says Oswald, “There’s a growing research body of literature showing that happy people are more productive.”