Does job insecurity affect household consumption?

This paper confronts implications of precautionary saving models with micro-data on British households. The results provide support for the central proposition that unemployment risk leads households to defer consumption. A one standard deviation increase in unemployment risk for the head of household is estimated to reduce household consumption by 1.6%. Taking the spread of the distribution of job insecurity to consist of four standard deviations, this indicates that moving from the bottom to the top of the distribution of job insecurity implies a reduction in consumption of 6.4%. This effect is still greater for the young, those without non-labour income and manual workers--for whom precautionary effects might be expected to be stronger a priori. A further job insecurity effect from the head of household's partner is estimated. Euler equation estimates further support this conclusion. Consumer durables purchases are also examined and found to be deferred by greater unemployment risk. Copyright 2006, Oxford University Press.