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Job Displacement Insurance and (the Lack of) Consumption-Smoothing
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Job Displacement Insurance and (the Lack of) Consumption-Smoothing
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Journal Article
Job Displacement Insurance and (the Lack of) Consumption-Smoothing
2021
Overview
We study the spending profile of workers who experience both a positive transitory income shock (lump-sum severance pay) and a negative permanent income shock (layoff). Using de-identified expenditure and employment data from Brazil, we show that workers increase spending at layoff by 35 percent despite experiencing a 14 percent long-term loss. We find high sensitivity of spending to cash-on-hand across consumption categories and for several sources of variation, including predictable income drops. A model with present-biased workers can rationalize our findings, and highlights the importance of the timing of benefit disbursement for the consumption-smoothing gains of job displacement insurance policies.
Publisher
American Economic Association
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