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The response of household wealth to the risk of losing the job: evidence from differences in firing costs

  • Cristina Barceló


    (Banco de España)

  • Ernesto Villanueva


    (Banco de España)

Economic theory predicts that individuals exposed to the risk of losing their job postpone their consumption and accumulate more assets to build a buffer stock of saving. We provide a new test of the hypothesis using substantial variation in severance payments across contracts in the Spanish labor market. Using the 2002 and 2005 waves of a new survey of wealth and consumption we estimate the link between the probability that several household members lose their job and the wealth and consumption of that household. We instrument the type of contract using regional variation in the amount, timing and target groups of subsidies given to fi rms to hire workers using high severance payment ones. We find that workers covered by fixed-term contracts accumulate more financial wealth. An increase in the probability of losing the job of 8 percentage points increases average financial wealth by 4 months of income. We provide simulations from a simple buffer stock and a permanent income models that suggest that our results are more likely to be generated by the former.

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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1002.

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Length: 58 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:bde:wpaper:1002
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