Philip A. Klein

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau
of Economic Research
Volume Title: Financial Adjustments to Unemployment
Volume Author/Editor: Klein, Philip A.
Volume Publisher: UMI
Volume ISBN: 0-87014-407-3
Volume URL: http://www.nber.org/books/klei65-1
Publication Date: 1965
Chapter Title: INTRODUCTION AND SUMMARY OF FINDINGS
Chapter Author: Philip A. Klein
Chapter URL: http://www.nber.org/chapters/c1649
Chapter pages in book: (p. 1 - 7)iNTRODUCTION AND
SUMMARY OF FINDINGS
THE HOUSEHOLD confronted with the drastic loss of weekly income
that unemployment brings must generally choose between two al-
ternatives: either continuing to spend at its current level by going
into debt or using up what it has put aside (that is, allowing its
net worth position to deteriorate), or reducing current expencli-
tures and maintaining net worth. To what extent do unemployed
persons use these alternatives, and what methods do they use?
This study analyzes the influence on financial adjustments to un-
employment of such factors as duration of the out-of-work period,
magnitude of weekly income loss during unemployment, asset and
debt position of the household at the time unemployment strikes,
and the effects of a variety of demographic and other factors on both
aggregate and specific adjustments. Financial adjustments are de-
fined as asset, debt, or expenditure adjustments.
CHARACTERISTICS OF THE SAMPLE
The basic data were gathered in six regional unemployment
compensation surveys made under the auspices of the Bureau of
Employment Security (BES) of the U.S. Department of Labor.
Local organizations conducted the surveys in six states from 1954
to 1958. The survey sample consistedof 1,836 persons selected from
those applying for unemployment compensation in a given week.
The questions asked were retrospective and concerned living ar-
rangements and finances during the year ending with the week of
the interview (called the survey year). Interviews typically lasted
from two to five hours and sometimes were split into two sessions.
The, interviewers were trained by the organization delegated by the
BES to carry out the survey in each region.2 FINANCIAL ADJUSTMENTS TO UNEMPLOYMENT
The characteristics of the sample by age, marital status, and oc-
cupation groups are in general agreement with Bureau of Labor
Statistics nationwide information for the insured unemployed.'
In comparison with the labor force as a whole, there are relatively
fewer very low or very high incomes and fewer very old or very
young household heads. What is more significant, perhaps, is that
the sample appears to have been more in debt before unemploy-
ment than the general population, and to have had smaller liquid
assets within each income class. The sample's pattern of expenditure
befoLe unemployment was much the same as was that of the popula-
tion at large. In general, it appears that the sample is sufficiently
representative to permit application of thefinclings of the study to
consumers generally, were they to undergo similar experiences.
SummaryofFindings
A1)J USTMENTS iN TFLE AGGREGATE
Households in which a wage earner becomes unemployed have
certain broad avenues of adjustment open to them. They can make
debt adjustments, expend assets, and cut down expenditures. Or
they can encourage other family members to find jobs so as to
compensate for the reduced income caused by unemployment.2
Net household income of the entire sample decreased during the
survey year by an estimated Earned income dropped
by more than that, but was partly offset by unemployment corn-
of648,000. 1-louseholds adjusted to the decline partly
by allowing a deterioration in their net worth, partly by reducing
current consumption outlays.
I Chi.squarc shows a significant divergence due largely to the under.
representation of the two Youngest age groups iiithe BES sample.It should
also be noted, as Appendix Table A-2 indicates, that the BES sample has rela-
tivelv more single persons than the BLS sample of the insured unemployed,
and fcwerwidowedor (livorced persons. However, the percentage of married
persons in the twosamplesis almost identical.
Laborforce participation byhouseholdmembers other than theclaimant
appareiitlv decreased during the period of claimant's unemployment. Earned
weekly household income in the sample was less at the end of the survey year
thami the difference between it and the weekly income earned by the claimant
at the beginning of the year. Possibly depressed local conditions resulted in
less iucome.earning opportunities for members of the family other than the
claimant.INTRODUCTION AND SUMMARY OF FINDINGS 3
Net worth adjustments involving debt came to approximately
$158,000. Households either increased outstanding debt or post-
poned repayment of existing debt, and incurred increases of about
$83,000 in money loans, $32,000 in unpaidbills, and $43,000 in
delinquencies and repossessions on durable goods. Asset holdings
were reduced by $322,000, most of it ($261,000) in checking and
savings accounts. For the rest of the income loss, $930,000, the house-
holds could only reduce consumption expenditures.
The figures have more significance, however, if it is asked what
unemployment meant to the individual household. The average
net reduction in household income during the survey year amounted
to $768—roughly 20 per cent of preun.employment income. Since
the period of unemployment averaged just over eighteen weeks,
this means the average household lost about $60 a week. Some of
this weekly income loss was offset through unemployment compen-
sation payments (about $19 a week). For the rest, the income loss
during the survey year was offset by an average debt adjustment
of $86 ($5 a week), an average net reduction in assets of $175 ($9
a week), and an average net decrease in expenditures (estimated
as a residual) of $506 (or $27 a week). Averages do not tell the whole
story because not everyone had assets to fall back on, and debt
adjustments were not equally available to all unemployed persons
—indeed, for some they were not available at all. In addition, of
course, there are differences among households in their preferences
for various adjustments.
Role of Debt. During the year in which unemployment occurred,
more than one-fourth of the households borrowed money either
from family, friends, or financial institutions. Many individuals
made use of several kinds of debt in adjusting to unemployment
—one could borrow money, run up unpaid bills, default on prior
debt obligations, and so on. The ability or willingness to utilize
debt tended to increase with both asset holdings and with the dura-
tion of unemployment.
Role of Liquid Assets. Liquid-asset holdings were the most im-
portant single factor in easing the impact of unemployment on cur-
rent expenditures. For the sample as a whole, expenditure reduction
averaged about two-thirds of the total net income reduction re-4 FINANCIAL ADJUSTMENTS TO UNEMPLOYMENT
suiting from unemployment; but for those individuals without
liquid assets, the reduction in total expenditures averaged about
90 per cent of the net income reduction on the average, compared
to a bit over 50 per cent for those who had assets. The reduction
in liquid assets held by subgroups of the sample was larger for older
age groups up to age 55, and larger for married individuals than
for single individuals; among occupational groups, it was largest
for l)rOfeSsiOflal and managerial persons and smallest for agricul-
türal workers. In all these cases the average change probably re-
flects the magnitude of liquid asset holdings prior to unemploy-
ment, although the data can corroborate this point for only about
a fifth of the sample.
Both liquid-asset reductions and debt increases represent a de-
cline in net worth and postponement of reduction in expenditures,
and both may be viewed as a way of limiting enforced expenditure
reductions in time of unemployment. The data suggest that debt
increases constitute a somewhat less important means of adjustment
than using liquid assets. Debt adjustments offset 11 per cent of the
income change for the entire sample, whereas asset reductions offset
23 per cent. Unemployment-induced debt adjustments tend to be
larger for those with outstanding debt prior to the onset of unem-
ployment, primarily because debt adjustments include the failure
to repay existing debt as reflected by delinquency and repossession,
which tend to be somewhat larger the higher the level of initial
debt. Further, consumption expenditures are reduced less, relative
to income, the larger the household's initial debt, partly because
debt adjustments increase but mainly because liquid-asset reduc-
tionis positively correlated with the amount of beginning-year
debt. In part, these findings reflect the fact that delinquencies on
debt for durable goods are possible only if the household has some
of this kind of debt to begin with; families with money loans before
unemployment placed less reliance on debt adjustments. It may also
be true that these findings reflect differences in preferences among
households—those who choose to reduce liquid assets in order to
maintain consumption may also be inclined to increase debt (or
fail to reduce it as scheduled), relative to those who prefer to reduce
consumption and maintain their liquidassets.INTRODUCTION AND SUMMARY OF FINDINGS 5
RELATIVE IMPORTANCE OF SPECIFIC TYPES OF ADJUSTMENT
Relative importance can be considered either in terms of the num-
ber of households that make a particular adjustment or by its dol-
lar amount. By either measure, drawing upon saving and checking
accounts is the most important type of adjustment, followed closely
by borrowing money and reducing food expenditures. These three
are far and away the most important of those considered. The ten
other types of adjustment for which both use and dollar volume
data were available are given in Table 7.
The findings concerning the importance of liquid-asset holdings
in the discussion of aggregate adjustments are supplemented by a
more detailed analysis, which indicates that those without liquid
assets had less flexibility in adjusting to unemployment-reduced in-
come than did the group with these assets: they were unable to
borrow as much, hence reduced their average expenditures for most
items to a greater degree. The pattern of relative importance of the
specific adjustments is not much altered by •the presence of liquid
assets, however. Furthermore, it is remarkably pervasive when the
sample is subdivided by a variety of demographic and other vari-
ables, such as age, occupation, earner status, degree of change in
assets, percentage change in income, and location among the six
geographical areas from which the samples were drawn. Because
some of the six surveys were conducted during.periods ofrecession
and others during expansion, the latter finding suggests that the
lattern of relative importance may be largely unaffected by the
stage of the business cycle during which unemployment occurs.
For the sample as a whole, the data suggest that about one-third
of the total income reduction was offset by various kinds of net
worth reductions and the remainder by reduction in expenditures.
For groups classified by duration of unemployment, the change in
expenditure as a proportion of the total net change in income (i.e.,
income earned during adjusted to include the un-
employment compensation payments received) shows that the mar-
ginal propensity to consume (MPC) rapidly approaches unity as
unemployment continues. By the time people are unemployed for
as long as twenty-four weeks, the MPC is more than .95 for those6 FtNANCIAL ADJUSTMENTS TO UNEMPLOYMENT
without liquid assets and .73 for those with liquidassets. That is
to say, the first group reduced expenditures by 95 cents for every
dollar reduction in income and the secorid.by only 73 cents. The
MPC is larger for the group without liquidassets unemployed
under ten weeks (.79) than. it is for the group which has such assets
and is unemployed over twenty-four weeks (.73). The net reduction
in expenditure is related both to the size of income and income
change, as well as to unemployment duration and liquid asset
holdings.
While the relative frequency with which alternative adjustments
are used is much the same regardless of the period of unemploy-
ment, there are nevertheless some differences worth noting. AcT-
justrnents which tend to increase most rapidly in the first nineteen
weeks of unemployment include delinquencies on rent, major home
improvements, appliances, and hospital payments; repossession of
appliances; sales of automobiles to raise funds; and decreases in
automobile operating expenses. Those which seem to show signifi-
cantly rapid increase only after twenty weeks of unemployment in-
chide delinquencies on mortgages and automobile auto
repossessions, and life insurance liquidations.
SOME IMPLICATIONS OF TFIE FINDINGS
There is evidence of the ability and desire of the unemployed
consumer to maintain expenditures, especially for short periods of
time, to the extent that liquid-asset holdings and ability to adjust
debt make this possible. The findings of this study have implica-
tions for assessing the destabilizing consequences of unemployment,
particularly unemployment of long duration. Reducing liquid as-
sets and increasing indebtedness (which is more feasible for those
with liquid-asset holdings) probably has a smaller destabilizing un-
pact on the economy than does the reduction of consumption ex-
penclitures. The latter initiates a chain of consequences which may
lead to cumulative contraction. Our estimates of the marginal pro-
to consume indicate that the destabilizing influence of un-
employment is increasingly serious the longer unemployment lasts,
and that liquid-asset holdings contribute a powerful—though tem-
porary—stabilizing influence. Debt adjustment, though quantita-INTRODUCTION AND SUMMARY OF FINDINGS 7
tivelyless important, also acts as a stabilizing (though equally tem-
porary) influence on consumption. Such income supplements as
unemployment compensation are quantitatively the most impor-
tant stabilizing element, and have the added advantage of not being
associated with a deterioration in the net worth position of the
household. The average length of unemployment in this sample
was slightly over eighteen weeks, and unemployment compensation
payments at that time continued generally for twenty-six weeks (fre-
quently not beginning for several weeks after the onset of unem-
ployment). Again, it is well to bear in mind that the average.period
of unemployment is the result of unemployment occurring both
during periods of expansion and contraction in the economy.
These findings, though tentative because of deficiencies in the
basic data, are nonetheless highly suggestive of the factors that have
helped to prevent serious recessions in the post-World War II per-
iod. Had income supplements not been as large,3 had the level of
liquid assets held by the public not been as high, and had the op-
portunities to utilize consumer credit not been as wi.despread as they
were, some of the mild recessions experienced since 1946 might well
have developed into more serious recessions or depressions.
3Ifthe average period of unemployment had been eight weeks longer, the
unemployment compensation component would usually have been used up.

Financial Adjustments to Unemployment

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics