Spending after Job Loss from the Great Recession through COVID-19 : The Roles of Financial Health, Race, and Policy

Using an administrative dataset covering 2 million job loss events we analyze the impact of unemployment insurance (UI) benefits on spending from 2008 to 2020. We find that during the Great Recession spending cuts after job loss were deeper than in the subsequent expansion, but in the COVID-19 recession spending increased after job loss for many, as government stimulus supported demand amid sharp declines in overall spending. Households’ tendency to spend out of income after job loss—their marginal propensity to consume (MPC)—has been fairly consistent over varying economic environments from 2008 to 2020. That said, across economic environments, there are large and consistent household-level differences in marginal propensity to consume. Specifically, following job loss, families with lower liquidity exhibit larger declines in spending in the face of income declines. In addition, Black and Latinx households cut their spending to a greater extent than White families after job loss, partially explained by their lower cash buffers and indicators of wealth. For policy, the findings suggest that countercyclical UI benefit levels are likely to be an effective means of stabilizing demand. Additional measures to target income supports with consideration to wealth inequality and racial equity can limit the welfare costs of job loss