The long-run consumption effects of earnings shocks

Although prior studies of job displacement and disability have measured the impact of these shocks in terms of lost earnings, no previous research has linked these permanent earnings shocks to the long-run consumption smoothi ng behavior of these households. Because consumption is generally considere d a better measure of well-being than is income, understanding the Link bet ween these earnings shocks and consumption is important in trying to gauge the magnitude of the long-nm impact caused by such events. Using the Panel Study of Income Dynamics, the analysis finds the percentage change in consu mption is generally less than that of the head's earnings and total family income, especially at the time of the shock The results also indicate that displaced households respond to an increase in the probability of future jo b losses by reducing their consumption prior to a job loss. These results s uggest that only focusing on earnings overestimates the impact of these sho cks on household well-being.