Source: State Library of NSW/Wikimedia Commons (Public Domain)

This post was authored by my colleague Professor Patrick Flavin of Baylor University.

One of the central sources of political conflict around the world is the extent to which government should intervene in the economy. As debates about policy unfold, politicians and regular citizens alike often point to tangible outcomes like the level of economic growth or the unemployment rate as useful metrics for evaluating the relative success of one policy choice over another. However, perhaps the most fundamental question when it comes to political debate and policy evaluation is whether a public policy promotes and advances human well-being. In other words, does a policy lead to a society where citizens are more satisfied with their lives?

With the steady increase in public opinion surveys asking about subjective well-being (and an accompanying academic literature that confirms the validity and reliability of those survey items), researchers are now capable of testing how observable economic and political factors affect human well-being. In sum, we are capable of studying life satisfaction in the same manner, and using the same methodological tools, with which we would approach any other human attribute. In our forthcoming article in the peer-reviewed European Journal of Political Research, Professor Alexander Pacek (Texas A&M University), Professor Benjamin Radcliff (University of Notre Dame), and I consider whether the findings of a large body of research on and well-being in the industrial democracies apply to a larger global context. In the industrial democracies, there is ample empirical evidence showing that human is best served by state interventions in the market that are specifically designed to protect workers (for example, see the article “Assessing the Impact of the Size and Scope of Government on Human Well-Being” in the peer-reviewed journal Social Forces (2014)). Thus, if regulating the labor market works to the advantage of workers in the West, we thus ask: Does that same conclusion apply to the rest of the world?

We focus our investigation on the effects of government intervention on well-being specifically on employment protections because, unlike the industrialized democracies, lower income countries do not typically have the fiscal capacity to establish a traditional social welfare state (i.e., a social safety net) in the form of generous transfer payments, social insurance, and public pensions.

From a theoretical perspective, we expect that more labor market regulation will lead to higher levels of happiness for several reasons. First, employment protections can shield workers from the destabilizing experience of arbitrarily losing one’s job, the immediate loss of income, and the need to search and secure new employment. Second, they can provide psychological peace of mind to workers who do not have to constantly losing their job. Third, they can allow workers a concrete benefit of a higher income (than the market may otherwise yield) in the form of a state-mandated minimum wage. That being said, we are also mindful of potential counterarguments to these expectations, such as the possibility that a more highly regulated labor market locks workers into jobs with little chance for advancement/improvement and that it may lessen the overall efficiency of a country’s economy and lead to lower incomes, particularly for workers. Because of these cross- possibilities, it is important to subject this question to empirical scrutiny.

To evaluate the relationship between labor market regulation and subjective well-being, we measured labor market regulation using data from the Fraser Institute’s “Economic Freedom of the World” report. The Fraser Institute (a conservative think tank, it is worth noting) compiles data on government spending and regulation around the world, assigning higher scores to countries with smaller government sectors, less regulation, and (in their estimation) more “freedom.” We use a subcomponent of their economic freedom index that specifically measures labor market regulation that is a combination of policies on the minimum wage, hiring and firing regulations, centralized collective bargaining, hours regulations, and mandated cost of worker dismissal. We measure subjective well-being using two data sources. First, we use individual-level data from the World Values Survey for 37 low-income countries for 1991-2014 where survey respondents are asked about how happy they are and how satisfied they are with their life. Second, we use survey data from the Gallup World Poll for 72 low-income countries for 2012 where respondents are asked to evaluate how happy they are with their life and (since our focus is on the effect of labor market regulations) how satisfied they are with their job. To account for other possible factors that impact well-being and allow us to isolate the effect of labor market regulation, we statistically control for a series of other individual (income, , health, marital status, age, etc.) and country-level variables (GDP, unemployment rate, economic growth, social connectedness, , etc.).

Our statistical analysis using both the World Values Survey and the Gallup World Poll to measure human well-being yields similar findings. Namely, people who live in countries that more stringently protect workers through labor market regulation report living happier and more satisfying lives, controlling for other factors. In terms of the size of real-world impact, we find that the positive effect of labor market regulation on human well-being is roughly equivalent to the positive effect of social connectedness (or the negative effect of the country’s unemployment rate), and just slightly less than the impact of a standard deviation increase in GDP per capita. Importantly, we also investigate the common criticism that labor market regulation harms the well-being of lower-income citizens and find, instead, that the positive effect of labor market regulation on subjective well-being is actually the largest among citizens with lower incomes.

Debates about public policy decisions often come down to debates over their anticipated effects on the everyday lives of citizens. The empirical analysis in our forthcoming article points to the important substantive conclusion that more stringent labor market policies lead to happier citizens. We hope that our findings help provide increased understanding of the effects of labor market regulation, and encourage future research on the implications of public policy for human well-being.