We present theoretical and empirical results on consumption during an unemployment spell. The theory model extends the conventional intertemporal allocation model to take explicit account of the fact that households buy clothing and small durable goods (such as pillows and plates) that are indivisible, irreversible and non-collateralisable. The theoretical analysis suggests that liquidity constrained agents cut back on expenditures on these small durables during a low income spell much more than would be suggested by the income elasticities of these goods in 'normal' times. Conversely, non-durable expenditures flows are much smoother than would be predicted in a model without durables. Thus it seems that agents can smooth utility flows even when total expenditure (on durables and non-durables) is quite volatile. The implications of this model are compared to the implications from three other widely used models of intertemporal allocation. In the empirical section, we exploit the information in a new Canadian panel survey of 20,000 workers who separated from a job in 1993 or 1995. As well as conventional survey information, this survey includes expenditure and asset information. Administrative data from several sources are linked to this panel to provide a detailed picture of the circumstances of households in which one member is unemployed. We estimate a joint total expenditure and demand system and test whether either the level of total expenditure or the structure of demand are sensitive to differences in the Unemployment Insurance benefit rate. We find that they are for households who have no liquid assets. Of the models that we consider, only the intertemporal allocation model proposed in this paper is consistent with this finding.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)