How does our wellbeing respond to a recession?

It’s important to understand the effect of recessions on people’s wellbeing to help shape social and economic policy. Earlier research has shown that, on average, people are happier when inflation and unemployment are low, with unemployment having the largest effect. Falls in wellbeing could be due to changes in our living conditions, caused by financial pressure, losing one’s job, declines in public services or welfare. Alternatively, it could be a more cognitive response from thinking about the effects on other people. Previous research also found there was a decline in wellbeing at the time of the UK’s recession in the early 1990s. Some research looking at the 2007-08 economic crisis suggests that wellbeing remained stable – but that was an average, which may not represent everyone’s experiences.

Does wellbeing track the stock market?

With the 2007-08 crisis, people may have started becoming aware of it in 2007 with bankruptcies in the US and the collapse of Northern Rock in the UK, or with the bailout of the banks in 2008 and stock market falls in October that year. One theory is that people’s wellbeing tracks the stock market, and that people’s fears for the economy and the future are fuelled by media coverage. If this is the case, we would expect to see wellbeing fall around the time of the crisis and recover by 2010. However, data from the World Database of Happiness (from 2002 to 2011) shows life satisfaction averaging around 7 (out of 10) throughout the decade, and the European Quality of Life Survey also shows life satisfaction in the UK unchanged from 2007-11, in contrast to other European countries.

Measuring wellbeing

However, the question a survey asks can affect the answers, and to measure wellbeing, one might ask how satisfied someone is with their life now, or how they feel about their life compared to an imagined ‘best possible life’. These could give us very different answers. It’s also important to consider how many people were directly affected.

Although the 2008 recession was severe, the number of people who were made unemployed was relatively small. So, although job insecurity rose, if most people were still in their jobs, this may also explain why wellbeing remained relatively stable on average.

Our paper compared two measures of wellbeing: self-reported life satisfaction and a measure of psychological health from the General Health Questionnaire (GHQ-12). We used Understanding Society and British Household Panel Survey data from 2004-10 – three waves from before the financial crisis and three from after it. We looked at people of working age, and took account of sex, age, employment status, marital status, having children living at home, educational attainment, homeownership, disability, and household income.

Decline in psychological health

The results showed no clear trend in life satisfaction, but there was a significant decline in people’s psychological health during the recession. This was true, in particular, of women, people in older age bands (35-49 and 50+), people with disabilities, and those with lower average household income. One surprising result was that young people – who had reportedly been hit hard by the crisis – did not experience a greater average decline than other age groups.

People who were economically inactive, or in and out of employment, also had lower levels of positive psychological health than those who were employed the whole time – but those who were consistently unemployed did not. The findings also suggest that the fall in wellbeing around the time of a recession is experienced not only by the people who experience negative events such as unemployment, but also by the majority who remain employed.

Only 23% of the sample had improving positive psychological health over the recession period, compared to 44% before the crisis, and only about 1% showed no change in either period. Around 3.6% of respondents saw their psychological health fall by more than one standard deviation, compared to around 1% in whom it improved.

The need for nuance

Although some research has suggested wellbeing remained stable, measures such as happiness and life satisfaction can mask the complexity of wellbeing and risk overlooking the impact of events such as recessions. There is strong evidence that people’s psychological health varied substantially from the mean over the study period, and we would advocate a more nuanced definition of wellbeing, which includes happiness and life satisfaction, but recognises that they are not the only important elements.

This blog was adapted from Insights, our annual summary of policy-relevant research using our data

Read the original research by David Bayliss, Wendy Olsen and Pierre Walthery in Applied Research in Quality of Life

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EmploymentHealth and wellbeing