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Borrowing during unemployment: unsecured debt as a safety net

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  • James X. Sullivan

Abstract

Over the past two decades, U.S. consumers have increasingly relied on unsecured debt to finance consumption. The growth in unsecured debt has been particularly striking for low-income households. Some researchers have suggested that poor households use this debt to smooth consumption intertemporally, implying that these credit markets effectively serve as a safety net for disadvantaged households. This paper examines whether unsecured credit markets do, in fact, play an important role in the ability of disadvantaged households to supplement unemployment-induced earnings losses. I use panel data from two nationally representative surveys to address the two central questions of this paper. First, I consider whether households rely on unsecured credit markets to supplement temporary shortfalls in earnings. While I find no evidence that low-asset households borrow in response to these shortfalls, I show that households with assets do borrow. ; Among these households with assets, borrowing is particularly responsive to these idiosyncratic shocks for younger and less-educated households. The second question I consider is why low-asset households do not borrow. I provide evidence that they are not supplementing these lost earning via other income sources, showing that consumption falls in response to these earnings shortfalls. I also show that the borrowing and consumption behavior of low-asset households is different from other households. While some other explanations cannot be ruled out, the evidence presented here suggests that low-asset households do not have sufficient access to unsecured credit to help smooth consumption in response to transitory income shocks.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 958.

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Date of creation: 2005
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Publication status: Published in Proceedings of a conference held in Washington, DC. (2005 : April 7-8) : a Federal Reserve System Community Affairs Reseach Conference; Promises & Pitfalls: as Consumer Finance Options Multiply, Who Is Being Served and at What Cost?
Handle: RePEc:fip:fedhpr:958

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Keywords: Consumer credit ; Unemployment ; Households ; Income;

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Cited by:
  1. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
  2. Hyytinen, Ari & Putkuri, Hanna, 2012. "Household optimism and borrowing," Research Discussion Papers 21/2012, Bank of Finland.
  3. Peter Debbaut & Andra C. Ghent & Marianna Kudlyak, 2013. "Are young borrowers bad borrowers? Evidence from the Credit CARD Act of 2009," Working Paper 13-09, Federal Reserve Bank of Richmond.
  4. Ron Borzekowski & Elizabeth K. Kiser & Shaista Ahmed, 2006. "Consumers' use of debit cards: patterns, preferences, and price response," Finance and Economics Discussion Series 2006-16, Board of Governors of the Federal Reserve System (U.S.).
  5. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
  6. Bauer, Christian, 2011. "On the reservation wage under CARA and limited borrowing," Mathematical Social Sciences, Elsevier, vol. 62(2), pages 126-129, September.
  7. Julia Bredtmann & Sebastian Otten & Christian Rulff, 2014. "Husband’s Unemployment and Wife’s Labor Supply – The Added Worker Effect across Europe," Ruhr Economic Papers 0484, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  8. Tucker, Jenna N. & Key, Clinton C. & Grinstein-Weiss, Michal, 2014. "The benefits of saving at tax time: Evidence from the $aveNYC evaluation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 48(C), pages 50-61.
  9. James X. Sullivan, 2006. "Welfare Reform, Saving, and Vehicle Ownership: Do Asset Limits and Vehicle Exemptions Matter?," Journal of Human Resources, University of Wisconsin Press, vol. 41(1).
  10. Jaime Ruiz-Tagle & Leidy García & Álvaro Miranda, 2013. "Proceso de Endeudamiento y Sobre Endeudamiento de los Hogares en Chile," Working Papers Central Bank of Chile 703, Central Bank of Chile.
  11. Edouard Challe & Xavier Ragot, 2013. "Precautionary Saving over the Business Cycle," PSE Working Papers hal-00843150, HAL.
  12. 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.
  13. Agarwal, Sumit & Hu, Luojia & Huang, Xing, 2013. "Rushing into American Dream? House Prices, Timing of Homeownership, and Adjustment of Consumer Credit," Working Paper Series WP-2013-13, Federal Reserve Bank of Chicago.
  14. repec:hal:wpaper:hal-00843150 is not listed on IDEAS
  15. Raj Chetty, 2005. "Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity," NBER Working Papers 11760, National Bureau of Economic Research, Inc.
  16. H. Shaefer & Xiaoqing Song & Trina Williams Shanks, 2013. "Do single mothers in the United States use the Earned Income Tax Credit to reduce unsecured debt?," Review of Economics of the Household, Springer, vol. 11(4), pages 659-680, December.
  17. Marc K Chan, 2014. "Welfare Dependence and Self-Control: An Empirical Analysis," Working Paper Series 19, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  18. Tetsuo Ono, 2010. "Growth and unemployment in an OLG economy with public pensions," Journal of Population Economics, Springer, vol. 23(2), pages 737-767, March.

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