Unemployment and Consumption

In this paper we argue that the aggregate unemployment rate is a valuable measure of aggregate income uncertainty. According to the theory of precautionary saving, an increase in income uncertainty would be expected to increase saving. We use U.S. quarterly data on the consumption of motor vehicles first to examine whether unemployment has a negative effect on consumption and then to differentiate between the various explanations for this phenomenon. We conclude that the negative relationship between unemployment and consumption is due in large part to precautionary saving motives. 1