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Financial wealth, consumption smoothing, and income shocks due to job loss

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Author Info

  • Bloemen, Hans G.

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Stancanelli, Elena G.F.

Abstract

This paper investigates the consumption and savings behaviour of individuals that have experienced a job loss. Building on the scant literature on the issue, we test for the impact of unemployment benefits on consumption levels of the unemployed. We also expand on previous work in this area by investigating the rela­tionship between the level of benefits and the financial wealth of the unemployed. We use for the empirical analysis an unexplored dataset rich on information on financial assets of the unemployed. We conclude that there is significant hetero­geneity in the consumption responses of job losers to the income shock and that, for households with no savings at the time of job loss, unemployment benefits help smoothing consumption. In particular, we find that a decrease of ten per cent in the replacement rate would lead to a fall of two per cent in food expenditure of these households. The results of estimation also suggest considerable heterogeneity in the relationship between borrowing and the level of benefits. For households running debts before job loss, a significant (negative) relationship was detected.

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File URL: ftp://zappa.ubvu.vu.nl/20010036.pdf
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Bibliographic Info

Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0036.

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Date of creation: 2001
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Handle: RePEc:dgr:vuarem:2001-36

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Web page: http://www.feweb.vu.nl

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Keywords: Unemployment; Savings;

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References

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  1. Martin Browning & Thomas F. Crossley, 2000. "Luxuries Are Easier to Postpone: A Proof," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1022-1026, October.
  2. Martin Browning & Thomas Crossley, . "Unemployment Insurance Benefit Levels and Consumption Changes," Canadian International Labour Network Working Papers 25, McMaster University.
  3. Blundell, Richard & Magnac, Thierry & Meghir, Costas, 1997. "Savings and Labor-Market Transitions," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 153-64, April.
  4. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
  5. Elena Stancanelli & Hans Bloemen, 2001. "Individual Wealth, Reservation Wages, and Transitions into Employment," Sciences Po publications info:hdl:2441/9704, Sciences Po.
  6. Hans G. Bloemen, 2002. "The relation between wealth and labour market transitions: an empirical study for the Netherlands," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 249-268.
  7. Stancanelli, Elena G F, 1999. " Do the Rich Stay Unemployed Longer? An Empirical Study for the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(3), pages 295-314, August.
  8. Fortin, Bernard & Lacroix, Guy, 1997. "A Test of the Unitary and Collective Models of Household Labour Supply," Economic Journal, Royal Economic Society, vol. 107(443), pages 933-55, July.
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Cited by:
  1. Thomas Crossley & Hamish Low, 2011. "Borrowing constraints, the cost of precautionary saving and unemployment insurance," International Tax and Public Finance, Springer, vol. 18(6), pages 658-687, December.
  2. Thomas Crossley & Hamish Low, 2004. "When Might Unemployment Insurance Matter?," Department of Economics Working Papers 2004-04, McMaster University.
  3. Raj Chetty, 2005. "Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity," NBER Working Papers 11760, National Bureau of Economic Research, Inc.

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