Financial wealth, consumption smoothing, and income shocks due to job loss

This paper investigates the consumption and savings behaviour of individuals that have experienced a job loss. Building on the scant literature on the issue, we test for the impact of unemployment benefits on consumption levels of the unemployed. We also expand on previous work in this area by investigating the rela­tionship between the level of benefits and the financial wealth of the unemployed. We use for the empirical analysis an unexplored dataset rich on information on financial assets of the unemployed. We conclude that there is significant hetero­geneity in the consumption responses of job losers to the income shock and that, for households with no savings at the time of job loss, unemployment benefits help smoothing consumption. In particular, we find that a decrease of ten per cent in the replacement rate would lead to a fall of two per cent in food expenditure of these households. The results of estimation also suggest considerable heterogeneity in the relationship between borrowing and the level of benefits. For households running debts before job loss, a significant (negative) relationship was detected.