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Job Loss Expectations, Realizations, and Household Consumption Behavior


  • Melvin Stephens

    (Carnegie Mellon University and National Bureau of Economic Research)


Although the theoretical importance of expectations in decision-making is well known to economists, only a few empirical papers investigate the impact of individual subjective expectations on economic outcomes. This paper examines the link between expectations of future job losses and the subsequent impact that these expectations have on household consumption behavior. The first part of the paper documents the empirical relationship between job loss expectations and subsequent job losses. Subjective job loss expectations have significant predictive power in explaining future job losses even when standard demographic information known to be associated with the prevalence of job displacement is included in the analysis. Furthermore, higher subjective job loss probabilities are correlated with an increased expectation of future earnings declines. Overall, these results indicate that the variable for subjective job loss expectations is a meaningful predictor of subsequent displacement. Since a job displacement results in large and persistent earnings losses, job loss expectations should have an important impact on household consumption smoothing following a job loss. The second part of the paper finds that although a job loss significantly reduces household consumption, there is little evidence that the degree to which households anticipate job losses reduces the impact of displacement on consumption. Alternative models of interpreting responses to expectations questions and of household consumption behavior that may explain these results are discussed. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Melvin Stephens, 2004. "Job Loss Expectations, Realizations, and Household Consumption Behavior," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 253-269, February.
  • Handle: RePEc:tpr:restat:v:86:y:2004:i:1:p:253-269

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    References listed on IDEAS

    1. Alan B. Krueger, 1999. "Experimental Estimates of Education Production Functions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 497-532.
    2. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation of Elementary Education," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 577-599.
    3. Caroline M. Hoxby, 2000. "The Effects of Class Size on Student Achievement: New Evidence from Population Variation," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1239-1285.
    4. Topel, Robert, 1999. "Labor markets and economic growth," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 44, pages 2943-2984 Elsevier.
    5. Hanushek, Eric A., 2006. "School Resources," Handbook of the Economics of Education, Elsevier.
    6. Eide, Eric R. & Showalter, Mark H., 2001. "The effect of grade retention on educational and labor market outcomes," Economics of Education Review, Elsevier, vol. 20(6), pages 563-576, December.
    7. Murnane, Richard J & Willett, John B & Levy, Frank, 1995. "The Growing Importance of Cognitive Skills in Wage Determination," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 251-266, May.
    8. Jinyong Hahn & Petra Todd & Wilbert Van der Klaauw, 1999. "Evaluating the Effect of an Antidiscrimination Law Using a Regression-Discontinuity Design," NBER Working Papers 7131, National Bureau of Economic Research, Inc.
    9. Jonathan Guryan, 2001. "Does Money Matter? Regression-Discontinuity Estimates from Education Finance Reform in Massachusetts," NBER Working Papers 8269, National Bureau of Economic Research, Inc.
    10. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule to Estimate the Effect of Class Size on Scholastic Achievement," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 533-575.
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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making


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