Sullivan, James X. 2008. “Borrowing During Unemployment: Unsecured Debt as a Safety Net.” Journal of Human Resources 43(2): 383–412.
This paper examines whether unsecured credit markets help disadvantaged households supplement temporary shortfalls in earnings by investigating how unsecured debt responds to unemployment-induced earnings losses. Results indicate that very low-asset households—those in the bottom decile of total assets—do not borrow in response to these shortfalls. However, other low-asset households do borrow, increasing unsecured debt by more than 11 cents per dollar of earnings lost. In contrast, wealthy households do not increase unsecured debt during unemployment. The evidence suggests that very low-asset households do not have sufficient access to unsecured credit to smooth consumption over transitory unemployment spells.
James X. Sullivan is an Assistant Professor in the Department of Economics and Econometrics at the University of Notre Dame. The author thanks Joseph Altonji, Bruce Meyer, Christopher Taber, and two anonymous referees for their helpful comments and suggestions and Jonathan Gruber for sharing his unemployment insurance benefit simulation model. The Joint Center for Poverty Research (JCPR) provided generous support for this work. The author also benefited from the comments of Gadi Barlevy, Ulrich Doraszelski, Greg Duncan, Gary Engelhardt, Charles Grant, Luojia Hu, Brett Nelson, Marianne Page, Henry Siu, Robert Vigfusson, Thomas Wiseman, and seminar participants at the Board of Governors of the Federal Reserve System, the Bureau of Labor Statistics, the European University Institute, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of St. Louis, the College of the Holy Cross, the JCPR, Northwestern University, the University of Connecticut, the University of Notre Dame, the University of Western Michigan, and the U.S. Census Bureau. The data used in this article can be obtained beginning October 2008 through September 2011 from James X. Sullivan, University of Notre Dame, 447 Flanner Hall, Notre Dame, IN, 46556, sullivan.197@nd.edu.