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Unemployment and political trust across 24 Western democracies: evidence on a welfare state paradox
(2021)
Set against the backdrop of the Great Recession, the paper explores the interplay of unemployment experiences and political trust in the USA and 23 European countries between 2002 and 2017. Drawing on harmonized data from the European Social Survey and the General Social Survey, we confirm that citizens’ personal experiences of unemployment depress trust in democratic institutions in all countries. Using multilevel linear probability models, we show that the relationship between unemployment and political trust varies between countries, and that, paradoxically, the negative effect of unemployment on political trust is consistently stronger in the more generous welfare states. This result holds while controlling for a range of other household and country-level predictors, and even in mediation models that incorporate measures of households’ economic situation to explain the negative effect of unemployment on trust. As expected, country differences in the generosity of welfare states are reflected in the degree to which financial difficulties are mediating the relationship between unemployment and political trust. Overlaying economic deprivation, however, cultural mechanisms of stigmatization or status deprivation seem to create negative responses to unemployment experiences, and these render the effect of unemployment on political trust increasingly negative in objectively more generous welfare states.
The authors embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the "missing disinflation puzzle"), and a permanent gap between output and the pre-crisis trend output.
In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity).