Financial Wealth, Consumption Smoothing, and Income Shocks due to Job Loss

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  • 1 January 2003
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      • Published in RePEc
Abstract
One of the reasons for setting up an unemployment insurance scheme is to allow job losers to smooth consumption. However, very little is known to date on the consumption smoothing impact of unemployment benefits. Here, we test for the impact of unemployment benefits on changes in household food expenditure of individuals that have recently experienced a job loss, allowing for different levels of household’s financial wealth. We also study the relationship between unemployment benefits and financial wealth of the unemployed. We use for the empirical analysis a unique dataset rich on information on financial assets and debt of the unemployed. We conclude that there is significant heterogeneity in the consumption responses of job losers to the income shock. For households without financial wealth at the time of job loss, unemployment benefits help smoothing food consumption. The results of estimation also suggest considerable heterogeneity in the relationship between borrowing and the level of benefits. For households running debt before job loss, there is evidence that higher replacement rates lead to postponing of paying off debt.

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