Unemployment and Consumption: Note
Abstract
According to a new approach to demand theory, households produce the commodities that enter their utility functions with inputs of market goods and their own time (see Gary Becker, Becker and Robert T. Michael, Kelvin Lancaster, Richard Muth). Provided time and goods were not employed in fixed proportions in the production of commodities, consumers would have an incentive to substitute the former for the latter if the price of their time, measured, say, by their potential real wage rate, declined. Since the incidence of unemployment causes the price of time to fall, one would expect unemployed workers to substitute their own time for market goods in the production of commodities. In this note, I use the notion of substitution in production between goods and time to interpret data on detailed family consumption expenditures before and during unemployment. The information is contained in a survey of the insured unemployed. In particular, I focus on differences in the pattern of expenditure reductions that emerge when primary market workers are unemployed, compared to when secondary market workers are unemployed. I also examine differences in the estimated income elasticity of total consumption for claimants in low unemployment areas compared to that for claimants in high unemployment areas. A tentative part of this analysis is a computation of the reduction in total consumption due to substitution of time for goods that would occur if unemployment were fully anticipated and, hence, not accompanied by a reduction in permanent income.
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