Identity and wellbeing: How retiring makes the unemployed happier

Clemens Hetschko, Andreas Knabe, Ronnie Schöb

04 May 2012

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Most people adapt surprisingly well to changes in their lives. Even after tragic events such as the death of a family member or a chronic disease, they restore their former wellbeing, if not always completely (Clark et al 2008). There is one event, though, for which this appears not to be true – unemployment. Compared with other negative experiences, the life satisfaction of the unemployed does not restore itself even after having been unemployed for a long time. However, when analysing the actual affective wellbeing of the long-term unemployed during the day, one finds that their average experience of positive and negative emotions does not differ from that of the employed (Knabe et al 2010).

Identity, long-term unemployment, retirement

The reasons for the unhappiness of the long-term unemployed are thus more likely to be found in the overall self-assessment of their lives than in concrete experiences in their daily activities. For example, an unemployed person may suffer from a permanent loss of identity, since he no longer meets the norm of “being employed”.

George Akerlof and Rachel Kranton (2000) have proposed an economic theory of identity. Identity theory proposes that a person derives “identity utility” from belonging to a particular social category. A person’s wellbeing increases when she succeeds in identifying herself with a social category she feels she belongs to. How far she succeeds in this depends on how well she meets the social norms inherent in that category. In that sense, unemployment makes those people who consider themselves part of a social category “able-to-work members of society”, but who are no longer able to meet one of the most important norms of that group (ie being employed), unhappy.

To confirm this interpretation and to isolate this cause for the unhappiness of the long-term unemployed from other causes, we focus on a very special event in the life of the long-term unemployed – retirement (Hetschko et al 2011). Entering retirement brings about a change in the social category, but does not change anything else in the lives of the long-term unemployed. When a long-term unemployed person retires, she is still out of work, but she no longer identifies herself with the social category of those “able to work”, but rather with that of the retired. Retirees are no longer subjected to the social norm of having to be employed, thus evoking an increase in the identity utility and the wellbeing of the long-term unemployed. Employed people who retire, however, are – at least on average – not likely to experience any change in their identity utility, as they meet the social norm both before and after they retire.

Higher life satisfaction after retiring

Using data from the German Socio-Economic Panel, we look at the change in the life satisfaction (measured on a scale from 0 to 10) of employed and long-term unemployed people at the time of their retirement. We ensure that this coincides with a change of their social category by considering only those who report not wanting to go back to work after retiring. The results confirm our presumption that the social norm of working disappears upon retirement. The life satisfaction of the long-term unemployed rises considerably during the year of their retirement, while that of the employed hardly changes at all (see Figure 1).

Figure 1. Average life satisfaction at the time of retiring

Source: SOEP 1984-2009.

A regression analysis taking into account other factors that may affect life satisfaction confirms this effect. The average life satisfaction of a long-term unemployed male living in a partnership and with average personal characteristics (e.g. state of health and income) rises by approximately 0.3 points on a life satisfaction scale from 0 to 10. If he was actively looking for a job before retiring, his average life satisfaction even rises by nearly 0.7 points, and even more so if he experienced several unemployment spells in the past. Women who became unemployed for the first time shortly before retiring hardly benefit at all from retiring. However, if they had been unemployed several times during their life, their life satisfaction also rises considerably when they retire, by as far as 0.9 points if they were actively looking for work prior to retiring.

A comparison may help appreciate this observed rise in life satisfaction. The experience of a marriage causes a mere 0.2 point increase in average life satisfaction (see Lucas et al 2003). This comparison shows how strongly long-term unemployed people benefit from the change of their social category while retiring and the associated relief from not having to meet the social norm of being employed anymore. This underlines the importance of identity for individual wellbeing.

Does unemployment leave scars?

We can only make conjectures about the norms relevant for retirees. A “deserved” retirement may require having worked non-stop up to one’s retirement. If this is true, long-term unemployment prior to one’s retirement could mean a long-run impairing of one’s wellbeing beyond the point of retiring, ie unemployment could leave scars even after retirement. Our results show that, regardless of other changes such as income, health or other factors, the long-term unemployed return to the same level of life satisfaction they had reported before they became unemployed. We do not find evidence for the existence of a social norm that requires people to have been employed up to the point of retiring in order to earn it. Retirement identity is not retrospective with regard to unemployment.

Do these findings imply that every long-term unemployed person will be happy again as soon as he retires? According to Akerlof and Kranton (2000), this depends on which social category the individual feels he belongs to. The long-term unemployed have to accept the change in their social category in order to benefit from retirement. That is why we only compare long-term unemployed and employed people who report not intending to go back to a full-time job after retiring. While one could make retirement compulsory for the long-term unemployed after a certain age, one cannot force them to accept their retirement. Therefore, our findings should not be interpreted as recommending compulsory retirement of long-term unemployed people as a political measure. Nevertheless, our analysis shows the immense impact that the loss of identity caused by unemployment has on an individual’s wellbeing. Since we find that, after retiring, life satisfaction is brought back to the level it had before the last unemployment spell, the loss of identity seems to constitute the major portion of the long-term psychological cost of unemployment.

Editor’s Note: This was originally published in German on Vox consortium partner site Ökonomenstimme.

References

Akerlof, G A and R E Kranton (2000), “Economics and Identity”, Quarterly Journal of Economics 115(3), 715-753.
Clark, A E, E Diener, Y Georgellis and R E Lucas (2008), "Lags And Leads in Life Satisfaction: a Test of the Baseline Hypothesis", Economic Journal 118(529), F222-F243.
Hetschko, C, A Knabe and R Schöb (2011), Changing Identity: Retiring from Unemployment, Diskussionsbeiträge des Fachbereichs Wirtschaftswissenschaft der Freien Universität Berlin, 11/2011.
Knabe, A, S Rätzel, R Schöb and J Weimann (2010), “Dissatisfied with Life but Having a Good Day: Time-use and Wellbeing of the Unemployed“, Economic Journal 120(547), 867-889.
Lucas, R E, A E Clark, Y Georgellis and E Diener (2003), “Reexamining adaptation and the set point model of happiness: Reactions to changes in marital status”, Journal of Personality and Social Psychology, 84(3), 527-539.

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Topics:  Frontiers of economic research Labour markets

Tags:  unemployment, wellbeing, Retirement, identity

Junior Researcher at the School of Business and Economics, Freie Universität Berlin

Andreas Knabe

Assistant Professor, Free University Berlin and Research Affiliate, CESifo

Ronnie Schöb

Professor and Dean, School of Business & Economics, Freie Universität Berlin

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