Working Paper: NBER ID: w12388
Authors: Kerwin Kofi Charles; Melvin Stephens Jr.
Abstract: We study how the level and composition of household expenditures changes over the business cycle for households at different positions in the income distribution. Using data from the Consumer Expenditure Survey, we find that transitory, state-specific increases in unemployment causes lower income groups to lower their total expenditure outlays, contrary to the prediction of the textbook account of consumption behavior. In addition, in bad economic times these groups raise the share of their total outlays devoted to relative fixed outlays like home or car payments. These adjustments are primarily concentrated among reductions in outlays devoted to entertainment and personal care expenditures. We find no similar effects for households at higher positions in the income distribution. It is difficult to attribute these differences across households to differences in credit constraints, both because the specific results for credit holdings are imprecisely estimated and because income losses experienced by higher SES households are so small that there is, for them, little need to adjust consumption.
Keywords: Consumption; Business Cycle; Quasifixed Expenditures
JEL Codes: D12; E21; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increases in unemployment (J64) | Significant reductions in total expenditures among lower-income households (D12) |
| Increase in unemployment by 2 percentage points (F66) | Raises the share of expenditures on quasifixed items by about 8% (H59) |
| Economic downturns (E32) | Lower-income households increase the share of their total expenditure devoted to quasifixed expenditures (D12) |
| Economic changes (N14) | Reduction in entertainment and personal care expenditures for lower-income households (D12) |
| State-level economic conditions (H79) | Household consumption patterns (D10) |