Preliminary and Incomplete Comments Welcome Unemployment Insurance, Consumption Smoothing, and Private Insurance: Evidence from the PSID and CEX

Previous research on unemployment insurance (UI) has emphasized its disincentive effects for labor supply, but has largely ignored the insurance benefits provided by this public program. This paper directly assesses the consumption smoothing benefits of UI using two different sources of consumption data, the Panel Study of Income Dynamics (PSID) and the Consumer Expenditure Survey (CEX). The former survey provides precise data on employment transitions, but a limited measure of consumption; the latter measures total consumption, but only has noisy data on employment transitions. Nevertheless, I find in both surveys that UI significantly mitigates the consumption drop associated with unemployment. The extent of consumption smoothing is larger in the PSID data, however, and the two data sources disagree on whether UI smooths the consumption of necessities or non-necessities. While there is a consumption smoothing role for UI, both sets of results imply that UI is also to a large extent crowding out other sources of insurance against unemployment spells. I investigate this crowdout directly, and find that it appears to arise primarily through reduced wealth accumulation.