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Unemployment and household spending in rural and urban India: Evidence from panel data

We are delighted to invite you to the 7th Consumer Pyramids Research Seminar on 11 February 2021 at 6.00 PM IST. Ms. Manavi Gupta and Dr. Avinash Kishore from IFPRI will present

Unemployment and household spending in rural and urban India: Evidence from panel data

You can read their paper here. You can sign up for the webinar here.

Summary

Unemployment has been high in India in recent years-even before the onset of the pandemic and the lockdown. It reached 6.1 percent in 2017-18 - the highest in more than 40 years. What happens to the household consumption expenditure when a member becomes unemployed?

The authors use the CPHS panel data from 2019 and earlier years to answer this question. They try to measure the immediate impact of an employment shock on consumption patterns of poor and non-poor households in both rural and urban areas.

Loss of employment of an earning member leads to an immediate decline in household consumption expenditure. The decline is much larger for urban households (12.2 percent) compared to the rural ones (6.6 percent). Urban families have a significantly higher income elasticity of consumption.

The authors see the biggest change in consumption by households in the bottom and the top Montly Per Capita Expenditure deciles. The rich probably cut back more because they have higher discretionary expenses. The poor may not have enough savings or options to borrow to smooth consumption.

The biggest impact of unemployment is on discretionary expenses and the purchase of durable goods. But families also reduce health and education expenses significantly. This means that even a brief episode of unemployment may lead to a long-term impact on families’ welfare.

Female labour force participation is low in India. So, most Indian families are single-income families. We find that such families don’t start new loans after a job loss. Perhaps they can’t. Families with more than one earners are more likely to borrow after a member loses her job.

Government cash transfers help rural households in consumption smoothing. The reduction in consumption expenditure after an episode of job loss is marginally smaller for rural households that had recently received some cash transfer from the government.

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