Precaution and Risk Aversion: Decomposing the Effect of Unemployment Benefits on Saving

Jonas Kolsrud

No 2013:14, Working Paper Series from Uppsala University, Department of Economics

Abstract: Reduced form estimations of precautionary saving with respect to labor market risk have hitherto failed to consider that a decrease of say unemployment probability or an increase in unemployment insurance (UI) generosity affects saving not only by reducing the expected variance in earnings but also by raising expected earnings. This paper studies the possibility of decomposing the treatment effect of UI on asset accumulation into two parts; one part where more generous UI leads to raised expected earnings and a second part where a more generous UI reduces the expected variation in earnings. The decomposition is applied to rich Swedish register data on both financial assets and debt. UI’s effect on assets is identified with a kinked policy rule in the UI scheme. First, increased UI generosity has a significant effect, both economically and statistically, on asset holdings; a one percentage point increase in UI benefits decrease net financial asset holdings by 1 percentage point. Second, decomposing the total effect UI has on asset accumulation shows that raised expected earnings increase savings while a decreased variation in earnings decrease saving. Not accounting for the effect on expected earnings on saving underestimates the impact UI has on precautionary saving by 70 percent.

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: 37 pages
Date: 2013-08-13
New Economics Papers: this item is included in nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://uu.diva-portal.org/smash/get/diva2:643224/FULLTEXT01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2013_014

Access Statistics for this paper

More papers in Working Paper Series from Uppsala University, Department of Economics Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Ulrika Öjdeby ().