Working Paper, Department of Economics, Uppsala University 2011:11
A vast literature has investigated how unemployment insurance (UI) affects labor supply. However, the distorting effect of UI on labor supply is to a large extent determined by how well UI benefits smooth private consumption, which in turn depends on the resources available to the unemployed. To determine UI's consumption-smoothing effect, I exploit a kink in the deterministic relationship between previous earnings and unemployment benefits. The randomized assignment of benefits created by the kink allows me to identify how UI affect the use of private wealth to finance consumption during unemployment spells. Using Swedish data for 2000 - 2002 I find that a large share of the unemployed actually can consume at the same level as they did prior to the layoff. I also find that loans are of great importance to consumption smoothing as more than half the sample lacks buffer savings. This is further emphasized for different subpopulations. Women, couples, and older individuals holds significantly larger liquid wealth than men and young singles.