Consumption Smoothing under Labor Market Shocks: Do Household Characteristics Impact Saving?

Abstract

We examine the response in household consumption spending with respect to fluctuations in income and local unemployment rate, exploiting a large panel dataset that spans the period of the 2007-2009 Great Recession. Both household-specific income uncertainty and local labor market uncertainty depress consumption spending. We also find evidence of heterogeneity in consumption behavior, most notably an inverted U-shaped response to income and unemployment rate fluctuations and a greater vulnerability to labor market risk by households with minor children and those with working-age adults under 40. We also find suggestive evidence that White and Asian households are less sensitive to labor market risk than are underrepresented minority households. We show that households respond to both changes in expected and unexpected income, but are more sensitive to negative income shocks than positive shocks.

Keywords: Consumption Smoothing, Great Recession, Uncertainty

JEL Classification: D12, D14, E21, E32