Unemployment Shocks, Cyclical Prices and Shopping Behavior

Abstract

We use rich data from Norway’s biggest grocery chain to show how households and grocery stores react to changing economic conditions. We exploit the regional nature of a recession following the drop in the oil price in 2014 and find that when the local unemployment rate increases, households shift toward cheaper stores, and toward bulk and private label products. Households also buy more on sale and the average store level prices decreases. We then derive a novel decomposition of the changes in the prices households pay for products a in large number of product categories. The decomposition allows us to measure the relative importance of the different sources of price cyclicality. We find that a significant part of the cyclicality is explained by grocery stores responding to economic downturns by lowering their prices. Still, changes in household behavior are the main driver of price cyclicality, primarily through increased willingness to take advantage of sales.