Consumer Spending During Unemployment: Positive and Normative Implications

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. (JEL D14, D91, E21, E24, E70, J65) How does consumer spending evolve during an unemployment spell? Understanding the path of spending during this particularly stressful period in a household's financial life is important for explaining fundamental household decisions and for designing an appropriate policy response. However, this question has been difficult to answer precisely in prior work because the existing data sources on

The Long-Term Effects of Labor Market Entry in a Recession: Evidence from the Asian Financial Crisis

“…We show that recession graduates' asset building is substantially delayed in settings where such migration pattern is absent. Our result complements evidence in the recent unemployment insurance literature that asset holdings buffer consumption decline when unemployment occurs (e.g., Kolsrud et al, 2018; Ganong and Noel, 2019). In addition, we provide evidence that recession cohorts rely on their parents or spouse to protect their living conditions against the initial negative shock.…”

“…Ganong and Noel (2019) find that debt financing plays a limited role in consumption smoothing among unemployed individuals subject to local labor market shocks.38 Given that the average age of the household head at the first home purchase is about 40, and the wives are about 2.3 years younger than their husbands in our data, the first home purchase would occur about 14-17 years after graduation for women.…”

“…34 In response to a labor market shock, individuals may also adjust their asset holdings. Studies have documented that consumption is less sensitive to a fall in income among those with more liquid assets (Kolsrud et al, 2018;Ganong and Noel, 2019). During an unemployment spell, individuals deplete their bank accounts or cut their savings for consumption smoothing (Kolsrud et al, 2018).…”

Macroeconomic Expectations and Credit Card Spending

“…Using the bank's administrative data, we estimate that monthly credit card spending in our data accounts, on average, for 32% of consumers' estimated monthly income. In comparison, Ganong and Noel (2019) use data from the JP Morgan Chase Institute and find that average credit and debit card spending accounted for 51% of monthly income in the United States. 7 5.…”

“…7. Based on results from Table 1 of Ganong and Noel (2019), who use a sample of credit and debit card customers in the three months prior to becoming unemployed.…”