Consumption, unemployment and the Great Recession

Abstract

Purpose – The purpose of this paper is to test whether households with members that experience job loss shocks are able to protect their previous level of consumption. The paper also tests whether consumption protection is affected when spells persist through time. Design/methodology/approach – The paper estimates an intertemporal consumption model, where households try to smooth their marginal utility over time. For that purpose it analyses Spanish household budget surveys that span a long period, 1999-2012, including the Great Recession. Unlike most consumption datasets, this microdata is designed as a panel and provides detailed information for all consumption categories as well as household members’ labour status. Findings – The paper finds that consumption smoothing is dependent on the household member facing the unemployment transition. In particular, only main breadwinner’s unemployment transitions affects consumption smoothing. It also shows that the consumption drop persists beyond the period of the job loss for ongoing spells, although it follows a decreasing pattern. Finally, the estimation results are stable over the business cycle. Practical implications – The results suggest that Spanish households are not capable of fully insuring against main breadwinner’s unemployment shocks. Further, the results show that this effect remains up to two years for ongoing unemployment spells. Thus these results highlight a welfare loss by Spanish households with unemployed members. Originality/value – The paper extends the usual analysis of job loss shocks by the main breadwinner to include the cases of both the spouse and the rest of household members, who tend to account for most unemployment. Further, it tests for unemployment persistence. Finally, it checks the sensitivity of the results to the business cycle, including the Great Recession.