Consumption dynamics under time-varying unemployment risk

Abstract

Private consumption demand falls in response to increased unemployment risk during a recession, as households increase their precautionary savings and postpone irreversible durable investments. The postponement effect is seven times as large as the precautionary-savings effect in a calibrated bufferstock savings model. In consequence, anticipation of future unemployment risk is more important than realized unemployment shocks in accounting for durable expenditure dynamics during recessions, while the opposite is true for nondurables. The importance of anticipation of future unemployment risk also means that having many 'hand-to-mouth' households, who do not respond to changes in income risk, significantly dampens the demand response for durables to an adverse labor market shock. We find that the model elasticities of durable and nondurable expenditures with respect to unemployment risk are close to what we estimate in micro survey data. * This paper supersedes an earlier version entitled "Durable Expenditure Dynamics under Time-Varying Income Risk". We are very grateful for helpful comments and critiques from

Impact of Occupational Unemployment Risk on Household Spending

“…A third body of literature closely related to our own is the one analyzing the impact of more general (not occupational) unemployment realization and unemployment risk changes on consumption growth. Most papers looking at the impact of unemployment and unemployment risk on spending focus on food spending (Harmenberg and Ôberg 2019;Dunn 1998;Benito 2006) because food spending, unlike much of consumer spending, is not fixed and can be easily changed when individuals become unemployed (Chetty and Szeidl 2007;Kingston 1978;Burgess 1981). Using this approach, Stephens (2004) finds that individuals cut food spending considerably when they become unemployed.…”

Overpersistence Bias in Individual Income Expectations and Its Aggregate Implications

“…Empirically, examples of recent analyses include studies estimating the MPC out of government transfers (Johnson et al, 2006;Parker et al, 2013;Misra and Surico, 2014;Parker, 2017), housing wealth (Mian et al, 2013;Kaplan et al, 2016), transitory income shocks (Jappelli and Pistaferri, 2014), lottery winnings (Fagereng et al, 2018) or interest rate changes (Crawley and Kuchler, 2020). Recent structural models investigate the relationship between MPCs and wealth (see, e.g., Kaplan and Violante (2014) and Carroll et al (2017)) and between MPCs and the business cycle (Berger and Vavra, 2015;Harmenberg and Öberg, 2017). The two most relevant studies for this paper in terms of modeling approach are Kaplan and Violante (2014) and Berger and Vavra (2015).…”

(S)Cars and the Great Recession

“…55 Harmenberg and Öberg (2021) consider the impact of unemployment shocks in a model with nonconvex costs of consumer durables. Our set‐up is significantly richer and a major difference is that we use the model for drawing inference on the shocks rather than understanding the impact of income risk. …”