Why Does Unemployment Hurt the Employed? Evidence from the Life Satisfaction Gap between the Public and the Private Sector

High rates of unemployment entail substantial costs to the working population interms of reduced subjective well-being. This paper studies the importance of individualeconomic security, in particular job security, in workers’ well-being by exploiting sectorspecificinstitutional differences in the exposure to economic shocks. Public servants havestricter dismissal protection and face a lower risk of their organization’s bankruptcy thanprivate sector employees. The empirical results for individual panel data for Germany andrepeated cross-sectional data for the United States and the European Union show that thesensitivity of subjective well-being to fluctuations in unemployment rates is much lower in thepublic sector than in the private. This suggests that increased economic insecurity constitutesan important welfare loss associated with high general unemployment.