Why you suffer when others lose their jobs

It sucks getting laid off -- even for those who keep their jobs.

There’s no mystery about the toll paid by workers who get laid off. Income plummets, self-esteem suffers and some unlucky people never regain their economic standing. Now, newly published research quantifies the cost of rising unemployment on those who remain employed. When some people lose their jobs, it turns out, we all lose.

Economists John F. Helliwell and Haifang Huang found that, when the unemployment rate rises by 1 percentage point, it affects the “subjective well-being” of those who remain employed the same as if their income had been cut by 4%. Subjective well-being basically means overall life satisfaction, as measured in surveys administered by Gallup and the Centers for Disease Control and Prevention. That includes the way people rate their quality of life in various categories and describe their emotions from day to day.

It bums people out when others lose their jobs, because they figure they might be next. “Workforce downsizing, relative to not changing the size of the workforce, has substantial negative effect on employed workers’ well-being,” the researchers conclude. “Workforce expansion, on the other hand, is associated with greater happiness.” Not surprisingly, layoffs close to home tend to make people more jittery than job losses far away.

A major economic problem

Those findings might seem self-evident, yet the magnitude of such “spillover” effects when the economy contracts is a major economic problem in itself. Growth in a consumer-driven economy like the one we have depends heavily on consumer psychology. When people are confident enough about the future to spend money instead of hoarding it, the economy grows and employers hire more people. When consumers become gloomy and rein in spending, business suffers and hiring drops.

That phenomenon has obviously been a factor during the past several years. From 2006 to 2009, the unemployment rate rose from 4.4% to 10%, an increase of 5.6 percentage points. If Helliwell and Haifang are right, that degraded the well-being of those who still had jobs the same as if they had lost about 22% of their income. Many of those who actually lost their jobs endured a bigger drop in income, of course, yet the anxiousness felt by those who remained employed clearly made a tough downturn worse.

It’s difficult, however, to imagine what policymakers or corporate bosses ought to do differently to make job losses less stressful for those who don’t get the axe. German-style policies that involve a reduced workweek for many instead of layoffs for a few might help reduce unemployment, but they haven’t really caught on among U.S. employers. Some companies make the mistake of assuring workers after a layoff that the worst is past, when more pain is actually on the way. Instead of making workers feel more confident, serial layoffs interspersed with bogus reassurances make the bosses look foolish and breed massive distrust along with plain old job insecurity. And since nobody has yet figured out how to predict the depth and duration of a recession, no one can accurately tell workers when the storm has passed.

The kind of insecurity produced by layoffs can also have an upside. Many workers get too complacent and make the mistake of assuming they’re indispensable. Others fail to notice when their job or department or even their whole company is threatened by tough times, ruthless competition or technological change. A little insecurity can force workers to contribute more, develop new skills or form a solid backup plan in case they’re shown the door. Satisfaction isn’t everything.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.