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Shocks, stocks and socks: smoothing consumption over a temporary income loss

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Listed:
  • Martin Browning

    (Institute of Economics, University of Copenhagen)

  • Thomas F. Crossley

    (Department of Economics, McMaster University, Hamilton)

Abstract

Recent research has demonstrated that some households cut back on expenditures in an unemployment spell. Moreover, some of these households respond to variation in the transitory income provided by unemployment insurance benefits. This suggests that these households are constrained in the sense that they respond to variations in current income even if these do not have any permanent impact. In this paper we take up the question of how households in temporarily straitened circumstances cut back and how they spend marginal dollars of transfer income. Our theoretical and empirical analysis emphasises the importance of allowing for the fact that households buy durable as well as non-durable goods. The theoretical analysis shows that in the short run households can significantly cut back on total expenditures without a significant fall in welfare if they concentrate their budget reductions on durables. We present an empirical analysis based on a Canadian survey of workers who experienced a job separation. Exploiting changes in the unemployment insurance system over our sample period we show that cuts in UI benefits lead to reductions in total expenditure with a stronger impact on clothing than on food expenditures. These effects are particularly strong for households with no liquid assets and/or households in which the lost income was ‘important’ for the household.

Suggested Citation

  • Martin Browning & Thomas F. Crossley, 2004. "Shocks, stocks and socks: smoothing consumption over a temporary income loss," CAM Working Papers 2004-05, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  • Handle: RePEc:kud:kuieca:2004_05
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    File URL: http://www.econ.ku.dk/cam/wp0910/wp0203/2004-05.pdf/
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    References listed on IDEAS

    as
    1. Martin Browning & Thomas F. Crossley & Guglielmo Weber, 2003. "Asking consumption questions in general purpose surveys," Economic Journal, Royal Economic Society, vol. 113(491), pages 540-567, November.
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    More about this item

    Keywords

    consumption; expenditure; durables; unemployment; unemployment insurance;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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