In this article we focus on the level of subjective well-being and its determinants among the unemployed as compared to those currently in paid labour. We subject three strongly contradictory theoretical approaches to an empirical test. The first is the traditional deprivation theory, which maintains that unemployment is a major psychological stressor. The second is the incentive theory, which claims that the level of well-being among the unemployed may be sufficiently high to discourage them from actively and effectively searching for a new job and re-entering the labour market. The third approach emphasizes the adverse effects of financial stress for subjective well-being during unemployment. We use the European Social Survey (ESS) data from 21 countries in our empirical analysis. We find no support for the incentive theory. The deprivation theory points in the right direction by stressing the psychological factors associated with unemployment but makes a notable omission by disregarding the financial strain which, according to our analysis, proves to be crucial for the well-being of the unemployed.
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