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Consumer Spending During Unemployment: Positive and Normative Implications

Author

Listed:
  • Peter Ganong

    (Chicago Harris School of Public Policy)

  • Pascal Noel

    (University of Chicago Booth School of Business)

Abstract

Using de-identified bank account data, we show that spending drops sharply at the large and predictable decrease in income arising from the exhaustion of unemployment insurance (UI) benefits. We use the high-frequency response to a predictable income decline as a new test to distinguish between alternative consumption models. The sensitivity of spending to income we document is inconsistent with rational models of liquidity-constrained households, but is consistent with behavioral models with present-biased or myopic households. Depressed spending after exhaustion also implies that the consumption-smoothing gains from extending UI benefits are four times larger than from raising UI benefit levels.

Suggested Citation

  • Peter Ganong & Pascal Noel, 2019. "Consumer Spending During Unemployment: Positive and Normative Implications," Working Papers 2019-006, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2019-006
    Note: M
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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Ganong_Noel_2019_consumer-spending-unemployment.pdf
    File Function: First version, November 29, 2019
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    References listed on IDEAS

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    More about this item

    Keywords

    unemployment; spending; buffer stock; Baily-Chetty;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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