Unemployment Insurance and Precautionary Saving
AbstractWe consider both theoretically and empirically the effect of unemployment insurance (UI) on precautionary savings behavior. Simulations of a stochastic life cycle model suggest that increasing the generosity of UI will substantially lower the asset holdings of the median worker, and that this effect will both rise with unemployment risk and fall with worker age. We test these implications by matching data on potential UI replacement rates to asset holdings in the Survey of Income and Program Participation (SIPP). Our empirical results are quite consistent with the predictions of the model. We find that raising the replacement rate for UI by 10 percentage points lowers financial asset holdings by 1.4 to 5.6%, so that UI crowds out up to one-half of private savings for the typical unemployment spell. We also find that this effect is stronger for those facing higher unemployment risk and weaker for older workers.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5252.
Date of creation: Sep 1995
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Note: LS PE
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Find related papers by JEL classification:
- J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
- H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
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