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Financial Wealth, Consumption Smoothing, and Income Shocks due to Job Loss

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  • Hans G. Bloemen

    ()
    (Free University Amsterdam, Department of Economics)

  • Elena G. F. Stancanelli

    ()
    (Observatoire Français des Conjonctures Économiques)

Abstract

One of the reasons for setting up an unemployment insurance scheme is to allow job losers to smooth consumption. However, very little is known to date on the consumption smoothing impact of unemployment benefits. Here, we test for the impact of unemployment benefits on changes in household food expenditure of individuals that have recently experienced a job loss, allowing for different levels of household’s financial wealth. We also study the relationship between unemployment benefits and financial wealth of the unemployed. We use for the empirical analysis a unique dataset rich on information on financial assets and debt of the unemployed. We conclude that there is significant heterogeneity in the consumption responses of job losers to the income shock. For households without financial wealth at the time of job loss, unemployment benefits help smoothing food consumption. The results of estimation also suggest considerable heterogeneity in the relationship between borrowing and the level of benefits. For households running debt before job loss, there is evidence that higher replacement rates lead to postponing of paying off debt.

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Bibliographic Info

Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2003-09.

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Date of creation: 2003
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Handle: RePEc:fce:doctra:0309

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Keywords: Unemployment; Savings. JEL Classification: J64; E21.;

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  1. 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.
  2. Bloemen, H., 1995. "The Relation Between Wealth and Labour Market Transitions: An Empirical Study for the Netherlands," Papers 9599, Tilburg - Center for Economic Research.
  3. Bloemen, Hans G & Stancanelli, Elena G F, 2001. "Individual Wealth, Reservation Wages, and Transitions into Employment," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 400-439, April.
  4. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  5. Martin Browning & Thomas Crossley, . "Unemployment Insurance Benefit Levels and Consumption Changes," Canadian International Labour Network Working Papers 25, McMaster University.
  6. Richard Blundell & Thierry Magnac & Costas Meghir, 1996. "Savings and labour market transitions," IFS Working Papers W96/05, Institute for Fiscal Studies.
  7. 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.
  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 F. Crossley & Hamish W. Low, 2004. "Borrowing Constraints, the Cost of Precautionary Saving, and Unemployment Insurance," Quantitative Studies in Economics and Population Research Reports 391, McMaster University.
  2. Raj Chetty, 2005. "Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity," NBER Working Papers 11760, National Bureau of Economic Research, Inc.
  3. Thomas Crossley & Hamish Low, 2004. "When Might Unemployment Insurance Matter?," Department of Economics Working Papers 2004-04, McMaster University.

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