Job Finding, Job Loss and Consumption Behaviour

According to the permanent income / life-cycle hypothesis (PILCH), under standard preferences anticipated changes in employment status should not affect the changes in consumption. In this paper, we investigate the consumption behaviour of individuals who lose their jobs and those who find a job. For a representative sample of American households anticipated changes between employment and unemployment states are identified using monthly transition expectations. Firstly, it is shown that expectations have significant predictive power conditional on individual characteristics and a set of time-varying controls. This allows us to use a two-stage estimation strategy, where expectations are used to explain anticipated changes in employment status
in the first stage and changes in consumption are regressed on anticipated changes in employment status in the second stage. Secondly, by estimating a first-order approximation of the Euler equation, it is shown that consumption expenditures are not sensitive to either anticipated transition into unemployment or anticipated transition into employment which is in line with the PILCH.