Labor Market Policy and Subjective Well-Being During the Great Recession

Abstract

While subjective well-being generally decreased in Europe during the Great Recession, some countries fared better than others. We assess how this experience varied across population subgroups and countries according to their labor market policies, specifically two types of unemployment support policies and employment protection legislation. We find both types of unemployment support, income replacement and active labor market policy (which assists the unemployed to find jobs), reduced the negative effects for most of the population (except youth); however, income replacement performed better, reducing the impacts of the Recession to a greater degree. In contrast, stricter employment protection legislation exacerbated the negative effects. This finding may be explained with suggestive evidence that indicates: legislation limiting the dismissal of employees curbed increases in unemployment but this benefit was more than offset, plausibly by perceptions of increased employment insecurity; and legislation limiting the use of temporary contracts may have exacerbated increases in unemployment. Our analysis is based on two-stage least squares regressions using individual subjective well-being data from Eurobarometer surveys and variation in labor market policy across 23 European countries.