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The Level and Composition of Consumption Over the Business Cycle: The Role of "Quasi-Fixed" Expenditures

  • Kerwin Kofi Charles
  • Melvin Stephens, Jr.

We study how the level and composition of household expenditures changes over the business cycle for households at different positions in the income distribution. Using data from the Consumer Expenditure Survey, we find that transitory, state-specific increases in unemployment causes lower income groups to lower their total expenditure outlays, contrary to the prediction of the textbook account of consumption behavior. In addition, in bad economic times these groups raise the share of their total outlays devoted to relative fixed outlays like home or car payments. These adjustments are primarily concentrated among reductions in outlays devoted to entertainment and personal care expenditures. We find no similar effects for households at higher positions in the income distribution. It is difficult to attribute these differences across households to differences in credit constraints, both because the specific results for credit holdings are imprecisely estimated and because income losses experienced by higher SES households are so small that there is, for them, little need to adjust consumption.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12388.

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Date of creation: Jul 2006
Date of revision:
Publication status: published as Blank, Danziger, Schoeni (eds.) Working and the Poor: How Economic and Policy Changes are Affecting Low Wage Workers. Russell Sage, 2006.
Handle: RePEc:nbr:nberwo:12388
Note: EFG LS
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  1. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  2. Orazio Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and bumps in lifetime consumption," IFS Working Papers W95/14, Institute for Fiscal Studies.
  3. Dirk Kreuger & Fabrizio Perri, 2002. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," Working Papers 02-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Susan E. Mayer & Christopher Jencks, 1989. "Poverty and the Distribution of Material Hardship," Journal of Human Resources, University of Wisconsin Press, vol. 24(1), pages 88-114.
  5. Bruce D. Meyer & James X. Sullivan, 2003. "Measuring the Well-Being of the Poor Using Income and Consumption," NBER Working Papers 9760, National Bureau of Economic Research, Inc.
  6. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  7. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  8. Richard Blundell & Ian Preston, 1997. "Consumption, inequality and income uncertainty," IFS Working Papers W97/15, Institute for Fiscal Studies.
  9. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
  10. David M. Cutler & Lawrence F. Katz, 1991. "Macroeconomic Performance and the Disadvantaged," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 1-74.
  11. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc.
  12. Martin Browning & Thomas F. Crossley, 2009. "Shocks, Stocks, and Socks: Smoothing Consumption Over a Temporary Income Loss," Journal of the European Economic Association, MIT Press, vol. 7(6), pages 1169-1192, December.
  13. Melvin Stephens Jr., 2003. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," NBER Working Papers 9976, National Bureau of Economic Research, Inc.
  14. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  15. Jayanta Bhattacharya & Thomas DeLeire & Steven Haider & Janet Currie, 2002. "Heat or Eat? Cold Weather Shocks and Nutrition in Poor American Families," NBER Working Papers 9004, National Bureau of Economic Research, Inc.
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