Consumer Spending during Unemployment: Positive and Normative Implications
American Economic Review
vol. 109,
no. 7, July 2019
(pp. 2383-2424)
(Complimentary)
Abstract
Using de-identified bank account data, we show that spending drops sharply at the large and predictable decrease in income arising from the exhaustion of unemployment insurance (UI) benefits. We use the high-frequency response to a predictable income decline as a new test to distinguish between alternative consumption models. The sensitivity of spending to income we document is inconsistent with rational models of liquidity-constrained households, but is consistent with behavioral models with present-biased or myopic households. Depressed spending after exhaustion also implies that the consumption-smoothing gains from extending UI benefits are four times larger than from raising UI benefit levels.Citation
Ganong, Peter, and Pascal Noel. 2019. "Consumer Spending during Unemployment: Positive and Normative Implications." American Economic Review, 109 (7): 2383-2424. DOI: 10.1257/aer.20170537Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- E21 Macroeconomics: Consumption; Saving; Wealth
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E70 Macro-Based Behavioral Economics: General
- J65 Unemployment Insurance; Severance Pay; Plant Closings