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New Research Says The Biggest Cost of a Recession is £200 of Fear

Originally Published 26 September 2001

The main cost of a recession is the fear it produces. New research from the University of Warwick shows that to compensate employed people for the fear and psychological losses from an economic downturn, the authors calculate, it would be necessary to give each person an extra ?200 for every year of recession.

Conventional wisdom is that recessions are costly because they lead to unemployment and lower incomes. But this misses the most important cost -- psychological losses and widespread fear of job loss -- according to University of Warwick economist Professor Andrew Oswald.

With Rafael Di Tella of Harvard and Robert MacCulloch of the LSE, Professor Oswald studied the mental wellbeing and life satisfaction levels of 300,000 Europeans through the last 3 great recessions through the 1970s to 1990s. In a downturn even those who kept their jobs and suffered no income loss, showed markedly lower levels of happiness and psychological wellbeing.

The research, which was sponsored by the Economic and Social Research Council, discovered that countries with generous unemployment benefit systems have citizens who are happier than those in nations with stingy benefits. Professor Oswald said:

"Britain now has one of the least-generous benefit systems in the Western world. That worked well in the prosperous 1990s, because it gave people sharp incentives, but a world recession now will bring a frightening reminder of what happens to human beings when you cut holes in their safety net."

The happiest countries over the period were the welfare states of the Netherlands, Denmark and Belgium. The least happy were Italy and Greece, which have weak benefit systems. To compensate employed people for the fear and psychological losses from an economic downturn, the authors calculate, it would be necessary to give each person an extra ?200 for every year of recession. Movements in Gross Domestic Product have large effects on the happiness of nations. The authors do not find evidence for the idea that Europe's welfare state led to high unemployment. The paper, The Macroeconomics of Happiness, is available on Professor Andrew Oswald's website.

For further information please contact:

Professor Andrew Oswald, Professor of Economics
University of Warwick Tel: 024 76 523510 (Office),
01367 860005 (Home)
email Andrew.Oswald@warwick.ac.uk (office)
a.j.oswald@oswald.co.uk (home)
Web http://www.oswald.co.uk


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