Unemployment Insurance and Precautionary Saving / Eric M. Engen, Jonathan Gruber.

By:

Engen, Eric M

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5252.Publication details: Cambridge, Mass. National Bureau of Economic Research 1995.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We consider both theoretically and empirically the effect of unemployment insurance (UI) on precautionary savings behavior. Simulations of a stochastic life cycle model suggest that increasing the generosity of UI will substantially lower the asset holdings of the median worker, and that this effect will both rise with unemployment risk and fall with worker age. We test these implications by matching data on potential UI replacement rates to asset holdings in the Survey of Income and Program Participation (SIPP). Our empirical results are quite consistent with the predictions of the model. We find that raising the replacement rate for UI by 10 percentage points lowers financial asset holdings by 1.4 to 5.6%, so that UI crowds out up to one-half of private savings for the typical unemployment spell. We also find that this effect is stronger for those facing higher unemployment risk and weaker for older workers.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
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Previous	nber w5249 Culture and Language /	nber w5250 Factors Determining Participation of the Elderly in SSI /	nber w5251 Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts /	nber w5252 Unemployment Insurance and Precautionary Saving /	nber w5253 Multinational Corporations, Outsourcing, and American Wage Divergence /	nber w5254 Labor Income Indices Designed for Use in Contracts Promoting Income Risk Management /	nber w5255 Trade and Production Networks of U.S. MNCs and Exports by Their Asian Affiliates /	Next

September 1995.

We consider both theoretically and empirically the effect of unemployment insurance (UI) on precautionary savings behavior. Simulations of a stochastic life cycle model suggest that increasing the generosity of UI will substantially lower the asset holdings of the median worker, and that this effect will both rise with unemployment risk and fall with worker age. We test these implications by matching data on potential UI replacement rates to asset holdings in the Survey of Income and Program Participation (SIPP). Our empirical results are quite consistent with the predictions of the model. We find that raising the replacement rate for UI by 10 percentage points lowers financial asset holdings by 1.4 to 5.6%, so that UI crowds out up to one-half of private savings for the typical unemployment spell. We also find that this effect is stronger for those facing higher unemployment risk and weaker for older workers.