Income changes and consumption: Evidence from the 2013 federal government shutdown

Abstract

We use the 2013 federal government shutdown and a rich data set from an online personal finance website to study the effects of changes in income on changes in consumption for thousands of affected workers. The 2013 shutdown represented a significant and unanticipated income shock for federal government workers, with no direct effect on permanent income. We exploit both the differences between unaffected state government employees and affected federal employees as well as between federal employees required to remain at work and those required to stay at home to generate variation in income and available time. We find strong evidence for excess sensitivity of consumption patterns, violating the permanent income hypothesis. We demonstrate that increased home production, changes in spending allocations, and credit constraints all play significant roles in driving spending. We discern detailed categories of household spending with widely varying elasticities. The results demonstrate the importance of household liquidity, leisure, and home production when constructing stimulus or social insurance policy.