Series: Working Papers. 1411.
Author: Rodolfo G. Campos and Iliana Reggio.
Topics: Household finances | Labour market | Quantitative methods | Prices and margins | Inflation | Consumption and saving.
Published in: European Economic Review, volume 78, pp. 39-54
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Abstract
By how much do employed households reduce their consumption when the aggregate unemployment rate rises? In Spain during the Great Recession a 1 percentage point increase in the unemployment rate was related to a strong drop in household consumption of more than 0.7% per equivalent adult. This reduction is the response of forward-looking agents to downward revisions of their expectations on future income growth rates: the shadow of unemployment. Using consumption panel data that include information on physical quantities, we show that the drop in consumption expenditure was indeed a reduction in quantities, and not a switch to cheaper alternatives.