Life satisfaction and austerity: Expectations and the macroeconomy

Abstract

We examine the linkages between fiscal austerity and life satisfaction across twelve European countries using a sample of repeated cross-sections of individuals from 1999 to 2014. Austerity policies may trigger several responses at both the macro and micro-level, which in turn may affect life satisfaction directly or indirectly. We employ mediation analysis to account for these complex relationships linking austerity to an individual’s life satisfaction, their economic expectations and their likelihood of unemployment. We find that austerity policies primarily affect individual life satisfaction via the economic expectations channel. Austerity dampens optimism about the future and this response has a negative effect on life satisfaction across a range of measures of economic expectations. In addition, our results suggest that changes in government expenditure, as opposed to taxation, matter for life satisfaction.