Estimating the Threshold Effect of Unemployment on Happiness

Unemployment is an important factor in reducing happiness. The empirical researches has demonstrated negative effect of unemployment on happiness. The point that has received less attention in previous studies is the role played by level of unemployment on its effectiveness on happiness. Using a panel data for 146 countries, this paper examines the unemployment effect on happiness and measures the amount of such effectiveness. The results indicate the negative impacts of unemployment and inflation rates and positive effect of the human development index on happiness. In addition, the coefficient of change in the slope of unemployment in its threshold rate is 12% and significant. Thus, the amount of unemployment impact on happiness depends on unemployment rate, so that the negative effect of unemployment is exaggerated with increase in unemployment rate beyond threshold rate. The comparison between coefficients of unemployment and inflation rates show that unemployment rate has more negative effect on happiness than inflation rate. Therefore, policy-makers are recommended to pay more attention to unemployment rate and to control it.