Can workfare programs offset the negative effect of unemployment on subjective well-being?

- Estimates the effect of a workfare program on subjective well-being in Germany.
- Employment in workfare has a substantial positive effect on subjective well-being.
- The effect of workfare can offset most of the negative effects of unemployment.

Previous research suggests that unemployment negatively affects indicators of mental health and well-being, but it remains unclear whether active labor market policy can offset this effect. This paper examines a workfare program that was a key part of Germany's active labor market policy for over 30 years. Fixed effects panel estimates suggest that participation in the workfare program offset most, though not all, of the negative effect of unemployment on subjective life satisfaction. Robustness tests find no evidence that this estimate is due to non-parallel time-trends, unobserved shocks in the pre-treatment period, adaptation to unemployment or differences in regional unemployment rates. These results suggest that active labor market policies can help reduce the negative psychological effect of unemployment.