Spending after Job Loss Fiona Greig Chris Wheat from the Great Recession George Eckerd Melissa O'Brien through COVID-19: The Roles Shantanu Banerjee of Financial Health, Race, and Policy AUGUST 2021 Introduction The loss of a job is a volatile event against the financial consequences events over this period make up the experienced by millions of U.S. of job loss. A wide racial wealth core sample. We organize the analysis households every year.1 Financial gap exists with Black and Latinx around the following questions: nest eggs in the form of liquid families holding considerably fewer 1. How has the impact of 3 balances are an important source liquid assets than White families. unemployment on spending of stability through such events. Unemployment insurance (UI) plays a decisions varied over time? However, the median household central role in the government’s policy 2. What is the influence of wealth, only has enough cash to cover a toolbox for supporting households few weeks’ worth of expenses. liquidity, and income level financially after job loss. However, on spending outcomes in the The unemployment rate varies limited data availability has made wake of a job loss event? dramatically across business cycles, it difficult to analyze precisely how and recessions often affect the payments translate to welfare gains 3. What racial disparities are population unevenly. Different over varying economic environments evident in the spending response segments of the workforce can be hit and, in particular, across different to unemployment, and what harder—more men lost their job during segments of the population. explains these differences? the financial crisis, while lower-income To help fill the gap, this report provides We find that during the Great service workers were more affected insight into the relationship between Recession spending cuts after job during the COVID-19 pandemic. A households’ financial health and the loss were deeper than during the common thread is that Black and welfare costs of job loss, building on subsequent expansion, but during the Latinx workers tend to be hit hardest prior Institute reports and academic COVID-19 recession spending increased and face higher unemployment rates research.4 The analysis leverages after job loss for many, as government 2 even during “good” times. In terms of an expanded dataset that dates stimulus supported demand amid welfare outcomes, these demographic back to 2007, allowing a perspective sharp declines in overall spending. differences are amplified, as prior that spans the Great Recession, the Households’ tendency to spend out of work shows that families with fewer expansion period, and the COVID-19 income after job loss—their marginal liquid assets are less able to self-insure recession. Over two million job loss propensity to consume (MPC)—has been fairly consistent over varying role in explaining the consumption of the efficacy of countercyclical UI economic environments from 2008 response to job loss than business as a macroeconomic stabilizer. When to 2020. That said, across economic cycle or local labor market conditions. demand from the employed population environments, there are large and These insights indicate that falls during a recession, directing fiscal consistent household-level differences incremental funds targeted towards the stimulus towards the unemployed has in marginal propensity to consume. neediest—notably, in terms of liquidity— offered a reliable “bang for buck.” Specifically, following job loss, families are most useful in limiting the welfare with lower liquidity exhibit larger costs of losing a job. Meanwhile, declines in spending in the face of delays in benefit payments are more income declines. In addition, Black consequential for the most financially Directing fiscal stimulus and Latinx households cut their vulnerable, implying that efficiency in towards the unemployed spending to a greater extent than the administration of UI is important. has offered a reliable White families after job loss, partially In addition, the relatively stable “bang for buck." explained by their lower cash buffers relationship between UI income and and indicators of wealth. Put simply, consumption in disparate economic household characteristics, such as environments provides an indication liquidity and race, play a much larger Table of Contents 4 Finding One 16 About the Data UI supplements implemented during COVID-19 prevented spending declines for the majority of people who lost their job, providing valuable support to the 18 Appendix 1 economy as overall demand was contracting sharply. This pattern contrasts with the sizable spending cuts 21 Appendix 2 observed for households experiencing unemployment in the Great Recession and subsequent expansion. 22 Appendix 3 7 Finding Two Households’ tendency to spend out of income after 24 Data Explanation job loss has been fairly consistent over varying unemployment environments from 2008 to 2020. 27 References 9 Finding Three 28 Endnotes Following job loss, households with lower liquidity exhibit larger drops in spending, particularly in the face of large income declines. 29 Acknowledgements and Suggested Citation 12 Finding Four Black and Latinx households cut their spending to a greater extent than White families when faced with job loss, partially explained by their lower cash buffers and indicators of wealth. 14 Conclusions & Implications Finding One UI supplements implemented during COVID-19 prevented spending declines for the majority of people who lost their job, providing valuable support to the economy as overall demand was contracting sharply. This pattern contrasts with the sizable spending cuts observed for households experiencing unemployment in the Great Recession and subsequent expansion. Households tend to cut spending may matter. Figure 1 shows trends in In 2020, in contrast, the spending of immediately after losing their job, an income and spending around job loss those receiving unemployment benefits intuitive response to falling incomes over three distinct macroeconomic rose, alongside increased UI benefit and rising uncertainty. In the economic environments—the Great Recession, levels.6 Despite the large differences expansion covering 2011 through 2019 the subsequent expansionary period, in spending outcomes after the onset the typical decrease in income was and the COVID-19 pandemic. During of COVID-19, we document in Finding approximately 15 percent in the first the Great Recession, we find that 2 that spending out of UI payments month after the start of UI payments, spending cuts were somewhat deeper reflected a proportional response to while spending dropped by 7 percent. than in the subsequent expansion on the increased payment amounts. However, the drivers of spending a year-over-year basis. However, the The event studies plotted in Figure 1 do are not constant over time. Varying proximate shock at the onset of UI was not take into account differences in the unemployment conditions—across time not quite as severe, on balance, in that composition of people who lost their job and geography—and policy changes recession—explained by reductions in in different periods, which may affect spending and income prior to job loss.5 Figure 1: Increases in payments during the pandemic boosted spending and income for those on UI. Year-over-year median total inflows change Year-over-year median spending change 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% −10% −10% −20% −20% −4 −2 0 2 4 −4 −2 0 2 4 Time since first UI payment (months) Time since first UI payment (months) Great Recession: January 2008 – December 2010 Expansion: January 2011 – December 2019 COVID-19: January 2020 – October 2020 Note: We track outcomes over the course of unemployment stints, which frequently span multiple months. Growth rates are year-over-year. The plot depicts the path of income and spending growth over an event time window in which the first month of UI receipt is denoted by t = 0. Total inflows are computed after subtracting off the net inflow from other accounts, like savings accounts. Source: JPMorgan Chase Institute View text version 4 Finding One Spending after Job Loss from the Great Recession through COVID-19 the interpretation of these figures. For depict the predicted year-over-year bulwark against demand contraction example, recent research documents that spending changes for the typical amid heightened uncertainty. job losses were heavier for households unemployed household over time, Variation in the effect of job loss with lower levels of education comparing predicted spend both over time stems from monthly fixed 7 8 during the pandemic. To control for with, and without, UI supplements. effects in the regression, which changes in the composition of the The magnitude of the income drop show the “independent” effect of unemployed population over time, we after job loss, including UI receipt, job loss exhibited by each month’s use a regression framework to explain was relatively stable in the years cohort of UI recipients. Importantly, spending after job loss using income leading up to the pandemic. To reflect this lens on the effect of job loss changes and controls for household the boost in spending attributable relies on a host of household-level characteristics and broader economic to UI policy change, we compute controls to hold constant the conditions. Appendix 1 provides the predicted spending change influence of policy and compositional additional details of our approach. at the elevated UI level against