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Shocks, stocks and socks: smoothing consumption over a temporary income loss

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Author Info

  • Martin Browning

    (Institute of Economics, University of Copenhagen)

  • Thomas F. Crossley

    (Department of Economics, McMaster University, Hamilton)

Abstract

Recent research has demonstrated that some households cut back on expenditures in an unemployment spell. Moreover, some of these households respond to variation in the transitory income provided by unemployment insurance benefits. This suggests that these households are constrained in the sense that they respond to variations in current income even if these do not have any permanent impact. In this paper we take up the question of how households in temporarily straitened circumstances cut back and how they spend marginal dollars of transfer income. Our theoretical and empirical analysis emphasises the importance of allowing for the fact that households buy durable as well as non-durable goods. The theoretical analysis shows that in the short run households can significantly cut back on total expenditures without a significant fall in welfare if they concentrate their budget reductions on durables. We present an empirical analysis based on a Canadian survey of workers who experienced a job separation. Exploiting changes in the unemployment insurance system over our sample period we show that cuts in UI benefits lead to reductions in total expenditure with a stronger impact on clothing than on food expenditures. These effects are particularly strong for households with no liquid assets and/or households in which the lost income was ‘important’ for the household.

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File URL: http://www.econ.ku.dk/cam/wp0910/wp0203/2004-05.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics in its series CAM Working Papers with number 2004-05.

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Length: 33 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:kud:kuieca:2004_05

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Keywords: consumption; expenditure; durables; unemployment; unemployment insurance;

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  1. Martin Browning & Thomas F. Crossley & Gugliemo Weber, 2002. "Asking Consumption Questions in General Purpose Surveys," CAM Working Papers 2002-05, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
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