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

Abstract

We examine the household consumption response to fluctuations in income and uncertainty, exploiting a large panel dataset that spans the period of the Great Recession. The results show that after controlling for changes in realized income, 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-shape response to income fluctuation and a greater vulnerability to labor market risk by male-only headed households and those with relatively intensive levels of occupation-specific human capital.

Keywords: Consumption Smoothing, Great Recession, Uncertainty

JEL Classification: D12, D14, E21, E32