RDP 2021-08: Job Loss, Subjective Expectations and Household Spending 8. Conclusion and Policy Implications

We find that employed workers have some ability to predict whether they will lose their jobs in the year ahead. But they typically overestimate the probability of job loss. These systematic overestimations vary with the business cycle, with workers typically overestimating job loss during economic downturns and in the period just prior to the COVID-19 pandemic. Unemployed workers also underestimate the duration of the unemployment spell.

We find that household spending falls significantly at the onset of unemployment. Households also reduce spending by similar amounts regardless of whether the job loss is expected or not. However, households do cut back more on their spending if they expect a period of unemployment to persist. The effect of unemployment on spending is particularly strong for households that are liquidity constrained and during economic downturns. In contrast, we find only limited evidence that concerns about future job loss affect spending for those workers that do not become unemployed. Taken together, our results provide mixed evidence for the predictions of workhorse consumption models.

For policymakers, our research quantifies the effect of unemployment on spending, a previously unexplored aspect of unemployment in the Australian literature. Our findings highlight the cost of unemployment to households, and underscore the importance of macroeconomic policies that keep unemployment low. Our finding that households reduce spending by more the longer they remain unemployed may imply a role for policies designed to reduce unemployment duration.