Labor market risks and welfare preferences: a bounded rationality approach

Abstract

  This study introduces a bounded rationality approach to welfare preference formation under exposure to labor market risks. It argues that risk exposure only increases welfare demand when it is reasonable to assume that workers are aware of their risk exposure and when future-related concerns are currently salient. Empirical analyses of longitudinal data from Switzerland and 28 European countries support the theory. Swiss workers only optimize their welfare preferences in a forward-looking manner when they become unemployed, and only the national unemployment rate is found to increase welfare demand in European countries. In contrast, a variety of risks on the occupational and individual level drawn from previous research are found to be unrelated with welfare preferences. The implication is that the risk exposure of employed workers may matter less for their welfare preferences and downstream political phenomena such as voting behavior than commonly expected.