Job Displacement Insurance and Consumption: Evidence from Brazil (with François Gerard)

• Development Workshop

Date and Location

Tuesday, March 12, 2019, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

The most common forms of government-mandated job displacement insurance are Severance Pay (SP; lump-sum payments at layoff) and Unemployment Insurance (UI; periodic payments contingent on non-employment). While there is a vast literature on UI, SP programs have received much less attention, even though they are prevalent across countries and predominant in developing countries. In particular, little is known about the insurance value that they provide to displaced workers, which critically relies on workers' ability to optimally dissave their lump-sum amount after layoff. We follow a standard approach in the UI literature that evaluates workers' need for insurance and the insurance value of policies by studying workers' consumption profile after layoff. We exploit a rare combination of de-identified high-frequency expenditure data and matched employee-employer data in the state of São Paulo, Brazil, where displaced workers are eligible for both UI and SP. Our main finding is that workers increase consumption at layoff by 35% despite experiencing a long-term consumption loss of 17% when they stop receiving any benefits. We refer to ``consumption'' because these patterns are robust across expenditure categories, and are not driven by durable goods. Moreover, the excess sensitivity of consumption to cash-on-hand is present across a rich set of policy variation in UI benefits and SP amounts. We show that a simple dynamic model of job search and consumption with myopic, present-bias, or saving-constrained agents is consistent with both reemployment and consumption patterns in our data. We then use these models to illustrate the usual incentive-insurance trade-off under counterfactual job displacement insurance designs. Our findings highlight the importance of the difference between SP and UI in their disbursement policy when consumption is highly sensitive to the timing of benefit payment -- beyond their different contingency policy -- and shed new light on the need for job displacement insurance in a developing country context.

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