Consumption effects of job loss expectations—New evidence for the euro area

Job loss expectations have predictive power for job loss and consumption. Using novel data, we find that the negative consumption response to an unexpected job loss is muted for workers with ex-ante job loss expectations — consistent with the Permanent Income Hypothesis — but stronger for workers with higher expected shock persistence. However, we do not find a positive consumption response of workers who unexpectedly retain their job. We relate this to persistent job loss expectations of non-displaced workers and therefore low persistence of the positive income shock. These heterogeneous results have important implications for how expectations shape economic behaviour.