Unemployment Insurance and Precautionary Saving

Eric M. Engen and Jonathan Gruber

No 5252, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider both theoretically and empirically the effect of unemployment insurance (UI) on precautionary savings behavior. Simulations of a stochastic life cycle model suggest that increasing the generosity of UI will substantially lower the asset holdings of the median worker, and that this effect will both rise with unemployment risk and fall with worker age. We test these implications by matching data on potential UI replacement rates to asset holdings in the Survey of Income and Program Participation (SIPP). Our empirical results are quite consistent with the predictions of the model. We find that raising the replacement rate for UI by 10 percentage points lowers financial asset holdings by 1.4 to 5.6%, so that UI crowds out up to one-half of private savings for the typical unemployment spell. We also find that this effect is stronger for those facing higher unemployment risk and weaker for older workers.

JEL-codes: H53 J65 (search for similar items in EconPapers)
Date: 1995-09
Note: LS PE
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Citations: View citations in EconPapers (58)

Published as Engen, Eric M. and Jonathan Gruber. "Unemployment Insurance And Precautionary Saving," Journal of Monetary Economics, 2001, v47(3,Jun), 545-579.

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