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Borrowing constraints, the cost of precautionary saving and unemployment insurance

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  • Thomas Crossley

    (Institute for Fiscal Studies and University of Essex and European University Institute)

  • Hamish Low

    (Institute for Fiscal Studies and University of Oxford & Nuffield College)

Abstract

Job losers exhibit significant heterogeneity in wealth holdings and in the marginal propensity to consume transitory income. We consider potential sources of this heterogeneity, whether (some of) the unemployed face borrowing constraints, and the implications of this heterogeneity for unemployment insurance. We show theoretically how the optimal benefit can depend significantly on borrowing constraints, and on other (non- precautionary) savings motives. We report empirical evidence that (i) a quarter of job losers cannot borrow for current consumption, (ii) this constraint is binding for a much smaller fraction, and (iii) that \'excess sensitivity\' is not limited to the constrained.

Suggested Citation

  • Thomas Crossley & Hamish Low, 2005. "Borrowing constraints, the cost of precautionary saving and unemployment insurance," IFS Working Papers W05/02, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:05/02
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    References listed on IDEAS

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    Cited by:

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    2. Stephanie de Mel, 2020. "A Job Worth Waiting for: Parental Wealth and Youth Unemployment in Ghana," IFS Working Papers W20/21, Institute for Fiscal Studies.
    3. Bhattacharyya, Chandril & Gupta, Manash Ranjan, 2020. "Union, Efficiency of Labour and Endogenous Growth," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 61(2), pages 170-202, December.
    4. Christoph Basten & Andreas Fagereng & Kjetil Telle, 2016. "Saving and Portfolio Allocation Before and After Job Loss," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 293-324, March.
    5. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
    6. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 283-318.
    7. Rothstein, Jesse & Rouse, Cecilia Elena, 2011. "Constrained after college: Student loans and early-career occupational choices," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 149-163, February.
    8. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 200(1), pages 15-39, March.
    9. Maren Froemel & Charles Gottlieb, 2021. "The Earned Income Tax Credit: Targeting the poor but crowding out wealth," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 193-227, February.
    10. Tetsuo Ono, 2010. "Growth and unemployment in an OLG economy with public pensions," Journal of Population Economics, Springer;European Society for Population Economics, vol. 23(2), pages 737-767, March.
    11. Cristina Barceló & Ernesto Villanueva, 2018. "The risk of job loss, household formation and housing demand: evidence from differences in severance payments," Working Papers 1849, Banco de España.

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    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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