Unemployment and Household Spending in Rural and Urban India: Evidence from Panel Data

Abstract

India has seen high levels of unemployment in recent years. Understanding how an episode of job loss affects household consumption expenditure is important for designing effective safety net programs. We apply difference-in-difference and quantile regressions to a high-frequency panel data from a nationally representative survey of 1,75,000 households in 2019 to estimate the impact of a job loss on household consumption expenditure – for urban and rural households, and households across different expenditure levels. We find that the loss of employment of an earning member leads to a significant immediate decline in household consumption expenditure. The decline is larger for urban households and households in the lowest and the highest income deciles. Durable and discretionary expenses go down the most. Expenditure on health and education also goes down significantly, especially, in urban areas. Our findings highlight the high vulnerability of urban households to economic shocks and can inform the design and targeting of income support and other safety-net programmes in India and other developing countries.