Shocks, stocks and socks: smoothing consumption over a temporary income loss

Martin Browning and Thomas Crossley ()

No 2004-05, CAM Working Papers from University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics

Abstract: Recent research has demonstrated that some households cut back on expenditures in an unemployment spell. Moreover, some of these households respond to variation in the transitory income provided by unemployment insurance benefits. This suggests that these households are constrained in the sense that they respond to variations in current income even if these do not have any permanent impact. In this paper we take up the question of how households in temporarily straitened circumstances cut back and how they spend marginal dollars of transfer income. Our theoretical and empirical analysis emphasises the importance of allowing for the fact that households buy durable as well as non-durable goods. The theoretical analysis shows that in the short run households can significantly cut back on total expenditures without a significant fall in welfare if they concentrate their budget reductions on durables. We present an empirical analysis based on a Canadian survey of workers who experienced a job separation. Exploiting changes in the unemployment insurance system over our sample period we show that cuts in UI benefits lead to reductions in total expenditure with a stronger impact on clothing than on food expenditures. These effects are particularly strong for households with no liquid assets and/or households in which the lost income was ‘important’ for the household.

Keywords: consumption; expenditure; durables; unemployment; unemployment insurance (search for similar items in EconPapers)
JEL-codes: D11 D12 D91 J65 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Shocks, Stocks, and Socks: Smoothing Consumption Over a Temporary Income Loss (2009)
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