Labor market conditions have deteriorated signiÖcantly since the Önancial crisis of 2007. In the US, from 2007 to 2009 around 8 million jobs were lost creating economic, social and political problems globally. Nonetheless, the attention of macroeconomists has, by and large, been conÖned to the e§ect of unemployment on earnings. The psychological cost of unemployment is overwhelmingly neglected. In his book, Layard (2006) Önds that, on average, a spell of unemployment can produce the same disutility to an individual as certain health issues and illnesses. The signiÖcance of the psychological cost of unemployment is a motivation here to investigate the extent that this additional cost can a§ect the labor market and particularly the way Örms and workers bargain to set the wage. Evidence shows that the psychological cost of unemployment tends to increase in the context of low unemployment throughout society (Clark 2003), hinting that there might be some interesting insights from a business cycle perspective. I demonstrate that modeling the psychological cost of unemployment in such a way accounts for the ampliÖcation puzzle in the search and matching literature.