Life satisfaction and austerity: expectations and the macroeconomy

This paper examines the linkages between fiscal austerity and life satisfaction across thirteen European countries using a sample of repeated cross-sections of individuals from 1999 to 2009. 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 a structural equation modelling approach to account for these complex relationships linking austerity to life satisfaction, the macroeconomic environment, an individual's expectations, and the probability of becoming unemployed. We find that austerity is inversely associated with life satisfaction, with a substantial effect operating through an increase in the unemployment rate. In all of the specifications there is also strong evidence of austerity dampening optimism about the future.