The Response of Household Wealth to the Risk of Losing the Job: Evidence from Differences in Firing Costs

58 Pages Posted: 22 Feb 2010

See all articles by Cristina Barcelo

Cristina Barcelo

Banco de España

Ernesto Villanueva

Banco de España - Research Department

Date Written: February 19, 2010

Abstract

Economic theory predicts that individuals exposed to the risk of losing their job postpone their consumption and accumulate more assets to build a buffer stock of saving. We provide a new test of the hypothesis using substantial variation in severance payments across contracts in the Spanish labor market. Using the 2002 and 2005 waves of a new survey of wealth and consumption we estimate the link between the probability that several household members lose their job and the wealth and consumption of that household. We instrument the type of contract using regional variation in the amount, timing and target groups of subsidies given to fi rms to hire workers using high severance payment ones. We find that workers covered by fixed-term contracts accumulate more financial wealth. An increase in the probability of losing the job of 8 percentage points increases average financial wealth by 4 months of income. We provide simulations from a simple buffer stock and a permanent income models that suggest that our results are more likely to be generated by the former.

Keywords: precautionary savings, household wealth and consumption, labor firing costs

JEL Classification: D12, D31, D91, J41

Suggested Citation

Barcelo, Cristina and Villanueva, Ernesto, The Response of Household Wealth to the Risk of Losing the Job: Evidence from Differences in Firing Costs (February 19, 2010). Banco de Espana Working Paper No. 1002, Available at SSRN: https://ssrn.com/abstract=1555614 or http://dx.doi.org/10.2139/ssrn.1555614

Cristina Barcelo (Contact Author)

Banco de España ( email )

Servicio de Estudios
Alcala, 48
Madrid, Madrid 28014
Spain
+34 91338 5887 (Phone)
+34 91 338 5678 (Fax)

Ernesto Villanueva

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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