Consumption Smoothing during Unemployment

Jonas Kolsrud

No 2011:10, Working Paper Series, Center for Labor Studies from Uppsala University, Department of Economics

Abstract: A vast literature has investigated how unemployment insurance (UI) affects labor supply. However, the distorting effect of UI on labor supply is to a large extent determined by how well UI benefits smooth private consumption, which in turn depends on the resources available to the unemployed. To determine UI’s consumption-smoothing effect, I exploit a kink in the deterministic relationship between previous earnings and unemployment benefits. The randomized assignment of benefits created by the kink allows me to identify how UI affect the use of private wealth to finance consumption during unemployment spells. Using Swedish data for 2000 - 2002 I find that a large share of the unemployed actually can consume at the same level as they did prior to the layoff. I also find that loans are of great importance to consumption smoothing as more than half the sample lacks buffer savings. This is further emphasized for different subpopulations. Women, couples, and older individuals holds significantly larger liquid wealth than men and young singles.

Keywords: Saving; wealth; unemployment benefit; unemployment; consumption smoothing (search for similar items in EconPapers)
JEL-codes: D91 J64 J65 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011-06-03
New Economics Papers: this item is included in nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Consumption Smoothing during Unemployment (2011)
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