The consumption response to temporary layoffs and hours losses

This paper examines how labor market displacement affects the consumption of American households using the US Current Population Survey (CPS). Specifically, I follow workers who experience temporary layoffs with or without a known recall date and workers who face involuntary reduction of work hours. Layoffs without recall date reduce spending on food by 15.2%, temporary layoffs with recall date reduce spending on food by 13%, while workers on involuntary hours reduction do not change food expenditure. The results are consistent with responses to unexpected shocks, supporting the permanent income hypothesis. Even though hours reductions significantly lower annual income, they have only a slight effect on lifetime income. This work highlights how different types of displacement trigger consumption responses via different channels. (C) 2016 Elsevier B.V. All rights reserved.