Unemployment and Consumption in Chile

Claudio Soto ()

Journal Economía Chilena (The Chilean Economy), 2004, vol. 7, issue 1, 31-50

Abstract: This article presents an empirical study of the effect of unemployment on aggregate consumption of nondurable goods in Chile for 1990-2002. Using an error-correction model, the results show that unemployment lags have a negative and statistically significant sort-run impact on consumption growth. Three hypotheses that relate unemployment and consumption are also analyzed. First, it is shown that unemployment is not a good predictor of future disposable income. Therefore, it does not signal changes in permanent income. Moreover, the results do not support the implications of the certainty-equivalence version of the permanent income hypothesis. Second, there is evidence that unemployment affects income volatility. Hence, the relationship between unemployment and consumption could be explained by the precautionary savings motive. However, for this mechanism to be consistent with the fact that unemployment has a negative impact on consumption growth, the effect of uncertainty on consumption must be persistent. Finally, there is also evidence that unemployment could affect consumption through its effect on income distribution. However, the latter result is not robust.

Date: 2004
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