Consumer Spending During Unemployment: Positive and Normative Implications

52 Pages Posted: 10 Jan 2019 Last revised: 8 Jul 2019

See all articles by Peter Ganong

Peter Ganong

University of Chicago; National Bureau of Economic Research (NBER)

Pascal Noel

University of Chicago Booth School of Business

Date Written: January 2019

Abstract

Using de-identified bank account data, we show that spending drops sharply at the large and predictable decrease in income arising from the exhaustion of unemployment insurance (UI) benefits. We use the high-frequency response to a predictable income decline as a new test to distinguish between alternative consumption models. The sensitivity of spending to income we document is inconsistent with rational models of liquidity-constrained households, but is consistent with behavioral models with present-biased or myopic households. Depressed spending after exhaustion also implies that the consumption-smoothing gains from extending UI benefits are four times larger than from raising UI benefit levels.

Suggested Citation

Ganong, Peter and Noel, Pascal, Consumer Spending During Unemployment: Positive and Normative Implications (January 2019). NBER Working Paper No. w25417, Available at SSRN: https://ssrn.com/abstract=3311387

Peter Ganong (Contact Author)

University of Chicago ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pascal Noel

University of Chicago Booth School of Business ( email )

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