Job Displacement Insurance and (the Lack of) Consumption-Smoothing
American Economic Review
vol. 111,
no. 3, March 2021
(pp. 899-942)
Abstract
We study the spending profile of workers who experience both a positive transitory income shock (lump-sum severance pay) and a negative permanent income shock (layoff ). Using de-identified expenditure and employment data from Brazil, we show that workers increase spending at layoff by 35 percent despite experiencing a 14 percent long-term loss. We find high sensitivity of spending to cash-on-hand across consumption categories and for several sources of variation, including predictable income drops. A model with present-biased workers can rationalize our findings, and highlights the importance of the timing of benefit disbursement for the consumption-smoothing gains of job displacement insurance policies.Citation
Gerard, François, and Joana Naritomi. 2021. "Job Displacement Insurance and (the Lack of) Consumption-Smoothing." American Economic Review, 111 (3): 899-942. DOI: 10.1257/aer.20190388Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- J63 Labor Turnover; Vacancies; Layoffs
- J65 Unemployment Insurance; Severance Pay; Plant Closings
- O12 Microeconomic Analyses of Economic Development