Knowledge of Future Job Loss and Implications for Unemployment Insurance

Abstract

This paper studies the implications of individuals’ knowledge of future job loss for the existence of an unemployment insurance (UI) market. Learning about job loss leads to consumption decreases and spousal labor supply increases. This suggests existing willingness to pay estimates for UI understate its value. But it yields new estimation methodologies that account for and exploit responses to learning about future job loss. Although the new willingness to pay estimates exceed previous estimates, I estimate much larger frictions imposed by private information. This suggests privately traded UI policies would be too adversely selected to be profitable, at any price. (JEL D82, D83, G22, J22, J64, J65)

Stable Income, Stable Family

“…This may be a result of recall error with regard to the timing of job losses. That said, it is also consistent with the fact that a significant share of workers anticipate layoffs before they happen (Stephens, 2004;Hendren, 2017;Pettinicchi, Vellekoop et al, 2019), which is not surprising because many workers are forewarned about upcoming layoffs and others may suspect the possibility if they know their firm is in distress or if they experience wage stagnation, reduced overtime, etc. That individuals "feel the effects" of an impending layoff is a consistent pattern in the literature on laid-off workers going back to Jacobson, LaLonde, and Sullivan (1993).…”

The Matching Multiplier and the Amplification of Recessions

“…Lastly, I drop observations where the two-year change in either food consumption or income is more than fourfold. These restrictions on outliers are similar to those in Hendren (2017), who excludes individuals with more than a threefold change in food consumption, and Gruber (1997), who excludes observations with a greater than 1.1 log change in food consumption.…”

The growth in permanent contracts and its potential impact on spending

“…Thus, based on the spending growth assumptions for households whose reference person has gone from a temporary contract to a permanent seasonal 1 See Blundell and Stoker (1999) or Banks, Blundell and Brugiavini (2001), who analyse how income uncertainty affects household spending developments in the United Kingdom. Hendren (2017) discusses how, among US households, spending decreases and labour market participation increases as their perceived probability of job loss rises. In Spain, Campos and Reggio (2015) examine precautionary saving during the Great Recession.…”

“…The increase may owe to the fact that contract conversion increases income in the long term (García-Louzao, Hospido and Ruggieri, 2023). 9Hendren (2017) argues that knowledge of a job loss affects spending even before the job is lost. Using a simple theoretical model,Blundell and Stoker (1999) show how consumption growth is affected by the time frame during which the future income uncertainty is resolved.10 Barceló and Vilanueva (2016) and Anghel,Barceló and Villanueva (2019).…”