Can activating labour market policy offset the detrimental life satisfaction effect of unemployment?

Unemployment has persistently been found to severely decrease the life satisfaction of individuals. Even after income and other socioeconomic characteristics are controlled for, the employment status remains an important determinant of happiness, pointing to non-pecuniary functions of work. But what effect does labour market policy have? Can the psychosocial functions of work be fulfilled by activation measures, offsetting the detrimental life satisfaction effect of unemployment? Analysing panel data, this paper shows that the biggest German activation programme 'One-Euro-Job' is connected to a level of life satisfaction that is significantly higher than the one of respective unemployed welfare benefit recipients. This effect is especially strong if participants perceive the measure to match their personal skills and to increase their future employment chances, but vanishes if participants perceive it as degrading. In total, satisfaction scores of participants do not match the level of the regularly employed. In contrast to these pronounced differences in cross-sectional analyses, longitudinal models show similar effects but are less statistically robust, pointing to certain selection biases.