Stress and Economics

The question

We live in a world of repeated crises, where economic shocks like stock-market crashes or unexpected layoffs are frequent occurrences. The impact of these shocks extends far beyond mere financial consequences. These deeply stressful experiences can cause lasting physical and mental harm, including accelerated aging and higher mortality. Furthermore, these ongoing biological stress responses alter major life decisions and lead to negative economic outcomes, such as diminished job performance and less career advancement. While traditional economics focuses on financial metrics like wage stabilization and job creation, it overlooks the underlying biological and physiological factors. To address this gap, the Stress and Economics project asks: Can the adverse impacts of crises on workers be ameliorated?

“Crises leave lasting marks on people’s beliefs, emotions and choices, shaping consumption, saving, investment and work decisions long after the initial shock has passed. By integrating insights from neuroscience, biology, cognitive science, epidemiology and psychiatry, my work seeks to design policies that reduce the long-term scarring effects of economic disruption.”

— Ulrike Malmendier

The approach

The project explores how employers and policymakers can reduce the harmful effects of stress and economic disruption on the workforce during times of industrial restructuring, sectoral decline, and economic and financial crises. Two measurable factors, which can be shaped by employer policies, play a key role: predictability (knowing what is coming) and controllability (feeling that one’s actions matter). Applying insights from neuroscience to labor-market settings, the researchers hypothesize that people cope significantly better with adverse shocks if they can anticipate what lies ahead and feel some degree of agency over it.

To test this, the research team will conduct “lab-in-the-field” workplace experiments in Nairobi, varying predictability and controllability in realistic, uncertain labor-market environments to measure the effects on mental health, job performance and longer-term earnings. This can be assessed, for example, by reducing uncertainty about the availability and types of work and wage payments, or by giving employees more control over the choice and timing of tasks. They will also explore whether work-focused cognitive behavioral therapy helps workers cope when stress is beyond anyone’s control, such as during a sudden wave of layoffs. Finally, they will study how past traumas impact a worker’s resilience.

These insights will guide employers and policymakers in responding to economic disruption not only with financial support, but also by fostering employee resilience and agency — an approach that may prove vital as automation and AI reshape the workforce.

The Stress and Economics project is being led by Ulrike Malmendier at the University of California, Berkeley, US.