IDEAS home Printed from https://ideas.repec.org/p/kud/kuieca/2004_05.html
   My bibliography  Save this paper

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

Author

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
    as

    Download full text from publisher

    File URL: http://www.econ.ku.dk/cam/wp0910/wp0203/2004-05.pdf/
    Download Restriction: no
    ---><---

    Other versions of this item:

    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carrieri, Vincenzo & Principe, Francesco, 2020. "WHO and for How Long? An Empirical Analysis of the Consumers' Response to Red Meat Warning," IZA Discussion Papers 13882, Institute of Labor Economics (IZA).
    2. Elisabeth Mueller, 2010. "Returns to Private Equity - Idiosyncratic Risk Does Matter!," Review of Finance, European Finance Association, vol. 15(3), pages 545-574.
    3. Savignac, Frédérique & Arrondel, Luc & Lamarche, Pierre, 2015. "Wealth effects on consumption across the wealth distribution: empirical evidence," Working Paper Series 1817, European Central Bank.
    4. Bruce D. Meyer & James X. Sullivan, 2009. "Five Decades of Consumption and Income Poverty," NBER Working Papers 14827, National Bureau of Economic Research, Inc.
    5. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2012. "Married with Children: A Collective Labor Supply Model with Detailed Time Use and Intrahousehold Expenditure Information," American Economic Review, American Economic Association, vol. 102(7), pages 3377-3405, December.
    6. Cristina Barceló, 2008. "The impact of alternative imputation methods on the measurement of income and wealth: Evidence from the Spanish survey of household finances," Working Papers 0829, Banco de España.
    7. Luc Arrondel & Pierre Lamarche & Frédérique Savignac, 2014. "Consommation et patrimoine des ménages : au‑delà du débat macroéconomique…," Économie et Statistique, Programme National Persée, vol. 472(1), pages 21-48.
    8. Bruce Headey, 2008. "Poverty Is Low Consumption and Low Wealth, Not Just Low Income," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 89(1), pages 23-39, October.
    9. Koval, Pavel & Polbin , Andrey, 2020. "Evaluation of permanent and transitory shocks role in consumption and income dynamics in the Russian Federation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 57, pages 6-29.
    10. Marta Lachowska, 2013. "Expenditure, Confidence, and Uncertainty: Identifying Shocks to Consumer Confidence Using Daily Data," Upjohn Working Papers and Journal Articles 13-197, W.E. Upjohn Institute for Employment Research.
    11. David Comerford & Liam Delaney & Colm Harmon, 2009. "Experimental Tests of Survey Responses to Expenditure Questions," Fiscal Studies, Institute for Fiscal Studies, vol. 30(Special I), pages 419-433, December.
    12. Pudney, Stephen, 2008. "Heaping and leaping: survey response behaviour and the dynamics of self-reported consumption expenditure," ISER Working Paper Series 2008-09, Institute for Social and Economic Research.
    13. Winter, Joachim, 0000. "Design effects in survey-based measures of household consumption," Sonderforschungsbereich 504 Publications 02-34, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    14. Mueller, Elisabeth, 2008. "How does owners' exposure to idiosyncratic risk influence the capital structure of private companies?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 185-198, March.
    15. Ian B. Page & Erik Lichtenberg & Monica Saavoss, 2020. "Estimating Willingness to Pay from Count Data When Survey Responses are Rounded," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(3), pages 657-675, March.
    16. Browning, Martin & Crossley, Thomas F., 2008. "The long-run cost of job loss as measured by consumption changes," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 109-120, July.
    17. Hoderlein, Stefan & Winter, Joachim, 2010. "Structural measurement errors in nonseparable models," Journal of Econometrics, Elsevier, vol. 157(2), pages 432-440, August.
    18. Bruce D. Meyer & James X. Sullivan, 2009. "Five Decades of Consumption and Income Poverty," NBER Working Papers 14827, National Bureau of Economic Research, Inc.
    19. Bernal Lobato, N., 2014. "Essays in applied microeconomics," Other publications TiSEM 9b638b3d-2f83-452a-b2c8-c, Tilburg University, School of Economics and Management.
    20. Garbinti, Bertrand & Lamarche, Pierre & Savignac, Frédérique & Lecanu, Charlélie, 2020. "Wealth effect on consumption during the sovereign debt crisis: households heterogeneity in the euro area," Working Paper Series 2357, European Central Bank.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kud:kuieca:2004_05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann). General contact details of provider: https://edirc.repec.org/data/camkudk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.