Although the life cycle/permanent income hypothesis is the primary framework for understanding household consumption and savings decisions, only a few studies have used clearly identifiable income changes to test the basic predictions of the model. The estimates produced using this empirical strategy have yet to lead to a consensus of beliefs since the results have both favored and rejected the model. This paper contributes to this literature by examining the consumption reaction to predictable increases in discretionary income following the final payment of a vehicle loan. Using data from the Consumer Expenditure Survey, the results show that a 10% increase in discretionary income due to a loan repayment leads to a 2% to 3% increase in nondurable consumption. Additional analysis suggests that these findings may be explained by the presence of borrowing constraints.

Although the theoretical importance of expectations in decision-making is well known to economists, only a few empirical papers investigate the impact of individual subjective expectations on economic outcomes. This paper examines the link between expectations of future job losses and the subsequent impact that these expectations have on household consumption behavior. The first part of the paper documents the empirical relationship between job loss expectations and subsequent job losses. Subjective job loss expectations have significant predictive power in explaining future job losses even when standard demographic information known to be associated with the prevalence of job displacement is included in the analysis. Furthermore, higher subjective job loss probabilities are correlated with an increased expectation of future earnings declines. Overall, these results indicate that the variable for subjective job loss expectations is a meaningful predictor of subsequent displacement. Since a job displacement results in large and persistent earnings losses, job loss expectations should have an important impact on household consumption smoothing following a job loss. The second part of the paper finds that although a job loss significantly reduces household consumption, there is little evidence that the degree to which households anticipate job losses reduces the impact of displacement on consumption. Alternative models of interpreting responses to expectations questions and of household consumption behavior that may explain these results are discussed.

Although prior studies of job displacement and disability have measured the impact of these shocks in terms of lost earnings, no previous research has linked these permanent earnings shocks to the long-run consumption smoothing behavior of these households. Because consumption is generally considered a better measure of well-being than is income, understanding the link between these earnings shocks and consumption is important in trying to gauge the magnitude of the long-run impact caused by such events. Using the Panel Study of Income Dynamics, the analysis finds the percentage change in consumption is generally less than that of the head's earnings and total family income, especially at the time of the shock. The results also indicate that displaced households respond to an increase in the probability of future job losses by reducing their consumption prior to a job loss. These results suggest that only focusing on earnings overestimates the impact of these shocks on household well-being.

This article examines the "added worker effect," which is the labor supply response of wives to their husbands' job losses. Unlike past studies, which focused on the husbands' current unemployment status, this article analyzes wives' responses before and after job losses to examine the life-cycle labor supply adjustments. Using Panel Study of Income Dynamics data reveals small predisplacement effects and large, persistent postdisplacement effects. The timing of the responses differs with type of displacement, possibly because of differences in the information acquired before job loss. Long-run labor supply increases compensate for over 25% of the husbands' lost income.

"3rd of tha Month": Do Social Security Recipients Smooth Consumption Between Checks? by Melvin Stephens Jr.. Published in volume 93, issue 1, pages 406-422 of American Economic Review, March 2003

Survey nonresponse has risen in recent years, which has increased the share of imputed and underreported values found on commonly used data sets. While this trend has been well documented for earnings, the growth in nonresponse to government transfers questions has received far less attention. We demonstrate analytically that the underreporting and imputation of transfer benefits can lead to program impact estimates that are substantially overstated when using instrumental variables methods to correct for endogeneity or measurement error in benefit amounts. We document the importance of failing to account for these issues using two empirical examples.

Earnings shocks should affect divorce probability by changing a couple’s expected gains from marriage. We find that the divorce hazard rises after a spouse’s job displacement but does not change after a spousal disability. This difference casts doubt on a purely pecuniary motivation for divorce following earnings shocks, since both types of shocks exhibit similar long‐run economic consequences. Furthermore, the increase in divorce is found only for layoffs and not for plant closings, suggesting that information conveyed about a partner’s noneconomic suitability as a mate due to a job loss may be more important than financial losses in precipitating divorce.

Previous research finds a systematic decrease in consumption at retirement, a finding that is inconsistent with the life cycle/permanent income hypothesis if retirement is an expected event. In this paper, we use workers' subjective beliefs about their retirement dates as an instrument for retirement. After demonstrating that subjective retirement expectations are strong predictors of subsequent retirement decisions, we still find a consumption decline at retirement for workers who retire when expected. However, our estimates of this consumption fall are about a third less than those found when we instead rely on the instrumental variables strategy used in prior studies.

Causal estimates of the benefits of increased schooling using US state schooling laws as instruments typically rely on specifications which assume common trends across states in the factors affecting different birth cohorts. Differential changes across states during this period, such as relative school quality improvements, suggest that this assumption may fail to hold. Across a number of outcomes including wages, unemployment, and divorce, we find that statistically significant causal estimates become insignificant and, in many instances, wrong-signed when allowing year of birth effects to vary across regions. (JEL H75, I21, I28, J24, N31, N32)

Exploiting county-level variation in oil-producing areas from shocks to world oil and gas prices, we study how local labor market conditions affect disability take-up. We extend well-known previous work using a similar research design by analyzing a different price shock; a larger, more representative set of labor markets; and a more recent period marked by skyrocketing disability payments. Our estimated elasticity for SSDI payments with respect to earnings of −0.29 is surprisingly similar to earlier findings. Our preferred SSI elasticity estimate of −0.16 is smaller than previous findings, but we show that SSI programmatic changes explain most of the difference.