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Consumption Smoothing during Unemployment

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  • Kolsrud, Jonas

    (Uppsala Center for Labor Studies)

Abstract

A vast literature has investigated how unemployment insurance (UI) affects labor supply. However, the distorting effect of UI on labor supply is to a large extent determined by how well UI benefits smooth private consumption, which in turn depends on the resources available to the unemployed. To determine UI’s consumption-smoothing effect, I exploit a kink in the deterministic relationship between previous earnings and unemployment benefits. The randomized assignment of benefits created by the kink allows me to identify how UI affect the use of private wealth to finance consumption during unemployment spells. Using Swedish data for 2000 - 2002 I find that a large share of the unemployed actually can consume at the same level as they did prior to the layoff. I also find that loans are of great importance to consumption smoothing as more than half the sample lacks buffer savings. This is further emphasized for different subpopulations. Women, couples, and older individuals holds significantly larger liquid wealth than men and young singles.

Suggested Citation

  • Kolsrud, Jonas, 2011. "Consumption Smoothing during Unemployment," Working Paper Series, Center for Labor Studies 2011:10, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uulswp:2011_010
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    File URL: http://www.ucls.nek.uu.se/digitalAssets/136/136508_201110.pdf
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    References listed on IDEAS

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    1. Helena Skyt Nielsen & Torben Sørensen & Christopher Taber, 2010. "Estimating the Effect of Student Aid on College Enrollment: Evidence from a Government Grant Policy Reform," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 185-215, National Bureau of Economic Research, Inc.
    2. Edin, P.-A. & Fredriksson, P., 2000. "LINDA - Longitudinal INdividual DAta for Sweden," Papers 2000:19, Uppsala - Working Paper Series.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Twenty states face bill for Unemployment Benefits
      by Eileen Norcross in Neighborhood Effects on 2012-02-02 00:53:31

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    Cited by:

    1. Levander, Mats, 2019. "Financial Buffers, Unemployment Duration and Replacement Labor Income," Working Paper Series 379, Sveriges Riksbank (Central Bank of Sweden).
    2. Kolsrud, Jonas, 2013. "Precaution and Risk Aversion: Decomposing the Effect of Unemployment Benefits on Saving," Working Paper Series 2013:14, Uppsala University, Department of Economics.

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    More about this item

    Keywords

    Saving; wealth; unemployment benefit; unemployment; consumption smoothing;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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