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Job losers exhibit significant heterogeneity in wealth holdings and in the marginal propensity to consume transitory income. We consider potential sources of this heterogeneity, whether (some of) the unemployed face borrowing constraints, and the implications of this heterogeneity for unemployment insurance. We show theoretically how the
optimal benefit can depend significantly on borrowing constraints, and on other (non-
precautionary) savings motives. We report empirical evidence that (i) a quarter of job
losers cannot borrow for current consumption, (ii) this constraint is binding for a much
smaller fraction, and (iii) that \'excess sensitivity\' is not limited to the constrained.
Authors
Research Fellow University of Oxford
Hamish is the James Meade Professor of Economics at the University of Oxford, a Professorial Fellow of Nuffield College and a Research Fellow at IFS.
Research Fellow University of Michigan
Tom is a Research Fellow at IFS, a Research Professor for the Institute for Social Research at the University of Michigan.
Working Paper details
- DOI
- 10.1920/wp.ifs.2005.0502
- Publisher
- IFS
Suggested citation
Crossley, T and Low, H. (2005). Borrowing constraints, the cost of precautionary saving and unemployment insurance. London: IFS. Available at: https://ifs.org.uk/publications/borrowing-constraints-cost-precautionary-saving-and-unemployment-insurance (accessed: 20 May 2024).
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