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Wealth and Consumption After Job Displacement

Published online by Cambridge University Press:  21 December 2021

Justin Barnette
Justin Barnette*
Affiliation:
Department of Economics, Kent State University, 330-672-1096, Kent, OH 44242, USA
*
Email: [email protected]
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Abstract

Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long run wealth in the USA. Upon displacement, wealth falls 14% relative to workers of the same age and similar education from the Panel Study of Income Dynamics (PSID). Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is small and statistically insignificant changes to consumption in the PSID whereas agents in the model decrease their consumption considerably. Extending the model to include habit formation reconciles some of these differences by generating similar long run effects on wealth. This allows for the examination of wealth at death through the lens of the model.

Keywords

Job lossunemploymentwealthconsumptionD31J63E21
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 3 , April 2023 , pp. 669 - 697
Copyright
© The Author(s), 2021. Published by Cambridge University Press

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