Working Paper: CEPR ID: DP13624
Authors: Camille Landais; Johannes Spinnewijn
Abstract: In the absence of unemployment insurance (UI) choices, the standard approach to estimatingthe value of UI is to infer it from the observed consumption response to job loss in combinationwith some assumption on preferences. Exploiting the unique data and policy context inSweden, we propose two alternative approaches, which we implement and compare to the standardconsumption-based approach on the exact same sample of workers. We nd that thedrop in consumption expenditures upon job loss is relatively small ( 13 percent), but themarginal propensity to consume (MPC), estimated using variation in local government transfers,is around 25 percent higher when unemployed than when employed. We show that thiswedge in MPCs, the focus of our rst approach, reveals a high relative price of smoothing consumption,con rmed by direct evidence on the limited consumption smoothing means availableduring unemployment. The estimated relative price provides a lower-bound on the value of UI,which turns out to be substantially higher than the consumption-based estimate under standardpreference assumptions. Exploiting the UI choices embedded in the Swedish UI system, we alsopropose a Revealed-Preference approach, which con rms that the average value of UI is largein our setting, but also reveals substantial dispersion in the value of UI, above and beyond thevariation in consumption drops.
Keywords: Unemployment Insurance; Consumption Smoothing; Revealed Preference; MPC
JEL Codes: H20; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| drop in consumption expenditures upon job loss (D12) | value of unemployment insurance (UI) (J65) |
| marginal propensity to consume (MPC) when unemployed (E29) | relative price of smoothing consumption during unemployment (J64) |
| relative price of smoothing consumption during unemployment (J64) | value of unemployment insurance (UI) (J65) |
| value of unemployment insurance (UI) (J65) | estimated value of UI (J65) |