UNEMPLOYMENT AND CONSUMPTION

In this paper we argue that the aggregate unemployment rateis a valuable measure of aggregate income uncertainty. Accordingto the theory of precautionary saving, an increase in incomeuncertainty would be expected to increase saving. We use U.S.quarterly data on the consumption of motor vehicles first toexamine whether unemployment has a negative effect on consumptionand then to differentiate between the various explanations forthis phenomenon. We conclude that the negative relationshipbetween unemployment and consumption is due in large part toprecautionary saving motives.