Private consumption under unemployment risk

This thesis examines how households adjust consumption and saving in response to unemployment risk, considering behaviour before job loss, during the unemployment spell, and following re-employment. The study is a literature review that draws on theoretical frameworks and empirical evidence to assess the extent to which standard consumption models account for observed household behaviour in response to job loss. The theoretical review traces the development of consumption theory from the Keynesian function through the life-cycle permanent-income hypothesis and the buffer-stock model. More recent extensions addressing wealth heterogeneity and behavioural departures from time-consistent preferences are also covered. The empirical review examines precautionary saving motives before unemployment, consumption and balance-sheet dynamics during the spell, and spending trajectories after re-employment, revising studies using longitudinal household surveys, administrative records, and high-frequency bank transaction data from multiple countries. The analysis section combines theoretical frameworks and empirical studies to explore the extent to which the theory aligns with the empirical findings. In conclusion, the life cycle, permanent income, and buffer-stock frameworks broadly capture the directional predictions of the evidence, as the precautionary wealth accumulation before job loss is consistent with model predictions and liquidity constraints account for a substantial share of the consumption decline during the spell. The frameworks, however, fail to account for the sharp drop in spending at benefit exhaustion and the endogenous compression of re-employment wages through balance-sheet depletion during the spell. The failure to rebuild precautionary buffers after re-employment is also present with low-wealth households, collectively suggesting that unemployment functions as a persistent rather than fully recoverable shock for a significant share of the population.