Reshaping Policies to Address Irrational Economic Thinking in the Chronically Unemployed

Governments worldwide strive to integrate the chronically unemployed into the labour market, aiming to enhance employment rates and reduce dependence on social welfare systems. Active Labour Market Policies (ALMPs) encompass diverse measures to facilitate this integration, yet challenges persist, particularly concerning the psychological barriers faced by long-term unemployed individuals. Drawing on Prospect Theory's loss aversion concept, this study investigates whether the chronically unemployed exhibit higher levels of loss aversion compared to the general population, impacting their decision-making regarding job-seeking and welfare benefits.

Using a Loss Aversion Questionnaire, this empirical study surveyed 190 participants enrolled in the "Welfare to Work" program, representing both the study population and the sample. Predominantly female (91%) and averaging 37 years old, participants provided insights into their risk attitudes and perceptions regarding employment and welfare benefits. Logistic regression analysis facilitated the calculation of loss-aversion coefficients, revealing notable distinctions between the chronically unemployed and previous study samples.

Results indicate a heightened level of risk aversion among the chronically unemployed, particularly concerning the potential loss of social welfare benefits upon gaining employment. Additionally, women exhibited lower loss aversion coefficients compared to men, suggesting a greater willingness to transition from welfare to work. These findings underscore the importance of addressing perceived losses associated with employment among the chronically unemployed, advocating for policies that mitigate such concerns and promote rational decision-making.

These findings hold significant implications for policymakers seeking to alleviate the reliance of the chronically unemployed on social welfare systems. Specifically, governmental strategies should focus on mitigating individuals' perceived loss of social benefits when transitioning into employment. By reframing the integration into the labour market as a positive gain rather than a loss, policymakers can encourage more rational decision-making among individuals, fostering a smoother transition into employment and reducing dependency on welfare support.