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Shocks, stocks and socks: consumption smoothing and the replacement of durables during an unemployment spell

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  • Martin Browning
  • Thomas Crossley

Abstract

We present theoretical and empirical results on consumption during an unemployment spell. The theory model extends the conventional intertemporal allocation model to take explicit account of the fact that households buy clothing and small durable goods (such as pillows and plates) that are indivisible, irreversible and non-collateralisable. The theoretical analysis suggests that liquidity constrained agents cut back on expenditures on these small durables during a low income spell much more than would be suggested by the income elasticities of these goods in 'normal' times. Conversely, non-durable expenditures flows are much smoother than would be predicted in a model without durables. Thus it seems that agents can smooth utility flows even when total expenditure (on durables and non-durables) is quite volatile. The implications of this model are compared to the implications from three other widely used models of intertemporal allocation. In the empirical section, we exploit the information in a new Canadian panel survey of 20,000 workers who separated from a job in 1993 or 1995. As well as conventional survey information, this survey includes expenditure and asset information. Administrative data from several sources are linked to this panel to provide a detailed picture of the circumstances of households in which one member is unemployed. We estimate a joint total expenditure and demand system and test whether either the level of total expenditure or the structure of demand are sensitive to differences in the Unemployment Insurance benefit rate. We find that they are for households who have no liquid assets. Of the models that we consider, only the intertemporal allocation model proposed in this paper is consistent with this finding.

Suggested Citation

  • Martin Browning & Thomas Crossley, "undated". "Shocks, stocks and socks: consumption smoothing and the replacement of durables during an unemployment spell," Canadian International Labour Network Working Papers 27, McMaster University.
  • Handle: RePEc:mcm:cilnwp:27
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    Cited by:

    1. Rasmus Lentz & Torben Tranaes, 2000. "Job Search, Savings and Wealth Effects," Econometric Society World Congress 2000 Contributed Papers 1447, Econometric Society.
    2. Christopher Farr and Maria J. Luengo-Prado, 2001. "The Implications of Lower Down Payments on Consumption Volatility," Computing in Economics and Finance 2001 196, Society for Computational Economics.
    3. Rasmus Lentz & Torben Tranas, 2005. "Job Search and Savings: Wealth Effects and Duration Dependence," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 467-490, July.
    4. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
    5. Jose Luengo-Prado, Maria, 2006. "Durables, nondurables, down payments and consumption excesses," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1509-1539, October.
    6. Samuel Bentolila & Andrea Ichino, 2000. "Unemployment and Consumption: Are Job Losses Less Painful near the Mediterranean?," CESifo Working Paper Series 372, CESifo Group Munich.
    7. Rong Hai & Dirk Krueger & Andrew Postlewaite, 2013. "On the Welfare Cost of Consumption Fluctuationsin the Presence of Memorable Goods," PIER Working Paper Archive 13-046, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    8. Egbert Jongen, 2009. "An analysis of individual accounts for the unemployment risk in the Netherlands," CPB Document 186, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Rong Hai & Andrew Postlewaite & Dirk Krueger, 2013. "On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version," PIER Working Paper Archive 14-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 15 Apr 2014.
    10. Andrew Benito, 2006. "Does job insecurity affect household consumption?," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 157-181, January.
    11. Rolf Aaberge & Magne Mogstad, 2006. "On the Definition and Measurement of Chronic Poverty," ICER Working Papers 36-2006, ICER - International Centre for Economic Research.
    12. Attanasio, Orazio P. & Szekely, Miguel, 2004. "Wage shocks and consumption variability in Mexico during the 1990s," Journal of Development Economics, Elsevier, vol. 73(1), pages 1-25, February.
    13. Jesus Fernández-Villaverde & Dirk Krueger, 2007. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 552-565, August.
    14. Orazio P. Attanasio & Miguel Székely, 2001. "Wage Shocks and Consumption Variability in Mexico during the 1990s," IDB Publications (Working Papers) 3291, Inter-American Development Bank.
    15. Jose Maria Casado, 2012. "Consumption partial insurance of Spanish households," Working Papers 1214, Banco de España;Working Papers Homepage.
    16. Miguel Székely & Orazio P. Attanasio, 2001. "Sacudidas salariales y variabilidad del consumo en México durante los años 90," Research Department Publications 4266, Inter-American Development Bank, Research Department.
    17. Namkee Ahn & Juan Ramón García & Juan F. Jimeno, "undated". "Well-being Consequences of Unemployment in Europe," Working Papers 2004-11, FEDEA.
    18. David J. McKenzie, 2001. "The Household Response to the Mexican Peso Crisis," Working Papers 01017, Stanford University, Department of Economics.
    19. José Casado, 2011. "From income to consumption: measuring households partial insurance," Empirical Economics, Springer, vol. 40(2), pages 471-495, April.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • 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

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