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The Long-Run Consumption Effects Of Earnings Shocks

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Author Info
Melvin Stephens
Abstract

Although prior studies of job displacement and disability have measured the impact of these shocks in terms of lost earnings, no previous research has linked these permanent earnings shocks to the long-run consumption smoothing behavior of these households. Because consumption is generally considered a better measure of well-being than is income, understanding the link between these earnings shocks and consumption is important in trying to gauge the magnitude of the long-run impact caused by such events. Using the Panel Study of Income Dynamics, the analysis finds the percentage change in consumption is generally less than that of the head's earnings and total family income, especially at the time of the shock. The results also indicate that displaced households respond to an increase in the probability of future job losses by reducing their consumption prior to a job loss. These results suggest that only focusing on earnings overestimates the impact of these shocks on household wellbeing. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 83 (2001)
Issue (Month): 1 (February)
Pages: 28-36
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Handle: RePEc:tpr:restat:v:83:y:2001:i:1:p:28-36

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  2. Lindelow, Magnus & Wagstaff, Adam, 2005. "Health shocks in China : are the poor and uninsured less protected ?," Policy Research Working Paper Series 3740, The World Bank. [Downloadable!]
  3. James X. Sullivan, 2005. "Borrowing during unemployment: unsecured debt as a safety net," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
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  4. Peter Auer & Janine Berg & Ibrahim Coulibaly, 2004. "Is a stable workforce good for the economy? Insights into the tenure-productivity-employment relationship," Employment strategy papers 2004-15, International Labour Office. [Downloadable!]
  5. Raj Chetty, 2006. "A Bound on Risk Aversion Using Labor Supply Elasticities," NBER Working Papers 12067, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. John Giles & Albert Park & Fang Cai, 2003. "How has Economic Restructuring Affected China’s Urban Workers?," William Davidson Institute Working Papers Series 2003-628, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  7. Reichling, Felix, 2006. "Optimal Unemployment Insurance in Labor Market Equilibrium when Workers can Self-Insure," MPRA Paper 5362, University Library of Munich, Germany, revised 16 Oct 2007. [Downloadable!]
  8. John M. Nunley, 2007. "The Effects of Household Income Volatility on Divorce," Working Papers 200718, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
  9. Raj Chetty, 2004. "Optimal Unemployment Insurance When Income Effects are Large," NBER Working Papers 10500, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Leena Rudanko, 2008. "Labor Market Dynamics under Long Term Wage Contracting," Boston University - Department of Economics - Working Papers Series wp2008-003, Boston University - Department of Economics. [Downloadable!]
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  11. Claudia R. Sahm, 2007. "Stability of risk preference," Finance and Economics Discussion Series 2007-66, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Charles Brown & James L. Medoff, 2001. "Firm Age and Wages," NBER Working Papers 8552, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Kerwin Kofi Charles & Melvin Stephens Jr., 2001. "Job Displacement, Disability, and Divorce," NBER Working Papers 8578, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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