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Unemployment Insurance Benefit Levels and Consumption Changes

  • Martin Browning
  • Thomas Crossley

A principal motivation for Unemployment Insurance (UI) schemes is to support consumption smoothing. The magnitude of the consumption smoothing benefits of UI depend on the extent to which households are liquidity constrained. We use a survey of unemployed people to examine how a job loss impacts on household expenditures. The principal focus is on the effect of the level of income replacement provided by UI. We restrict attention to a sub-sample of respondents who are still in their first spell of unemployment after six months. For this group we find large consumption falls, averaging about 14% of total expenditure. The actual fall depends on a variety of factors of which the most important is the pre-job loss ratio of the respondent's income to household income. These consumption falls confound the ‘permanent income’ or wealth shock of job loss, costs of working and, potentially, a liquidity constraint or ‘transitory income’ effect. The effects of varying the replacement ratio - which isolates the transitory effect - are relatively small. We only find effects for those who did not have assets at the job loss. Even for them, the elasticity of total expenditure with respect to benefit is small. We conclude that for most of our sample, small changes in the benefit level will have almost no effect on living standards within the household and hence little impact on other facets of behavior such as job search, unemployment duration and the quality of any new job taken. The data are consistent, however, with some households being liquidity constrained.

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Paper provided by McMaster University in its series Canadian International Labour Network Working Papers with number 25.

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Length: 36 pages
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Handle: RePEc:mcm:cilnwp:25
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