Unemployment insurance benefit levels and consumption changes

We use a Canadian survey of the unemployed to examine how household expenditures after a job loss respond to the level of income replacement provided by UI. We isolate a liquidity constraint or 'transitory income' effect from the 'permanent income' shock of job loss, and from the costs of working. We find significant effects of varying the replacement ratio among the third of the sample who did not have assets at the job loss. We conclude that the consumption smoothing benefit of UI is concentrated wholly on a sub-group of the unemployed. (C) 2001 Elsevier Science S.A. All rights reserved.