TY - JOUR AU - Engen,Eric M. AU - Gruber,Jonathan TI - Unemployment Insurance and Precautionary Saving JF - National Bureau of Economic Research Working Paper Series VL - No. 5252 PY - 1995 Y2 - September 1995 DO - 10.3386/w5252 UR - http://www.nber.org/papers/w5252 L1 - http://www.nber.org/papers/w5252.pdf N1 - Author contact info: Eric M. Engen American Enterprise Institute 1150 Seventeenth Street, NW Washington, DC 20036 Tel: 202/862-5837 Fax: 202/862-7177 E-Mail: eric.m.engen@frb.gov Jonathan Gruber Department of Economics, E52-434 MIT 77 Massachusetts Avenue Cambridge, MA 02139 Tel: 617/253-8892 Fax: 617/253-1330 E-Mail: gruberj@mit.edu AB - We consider both theoretically and empirically the effect of unemployment insurance (UI) on precautionary savings behavior. Simulations of a stochastic life cycle model suggest that increasing the generosity of UI will substantially lower the asset holdings of the median worker, and that this effect will both rise with unemployment risk and fall with worker age. We test these implications by matching data on potential UI replacement rates to asset holdings in the Survey of Income and Program Participation (SIPP). Our empirical results are quite consistent with the predictions of the model. We find that raising the replacement rate for UI by 10 percentage points lowers financial asset holdings by 1.4 to 5.6%, so that UI crowds out up to one-half of private savings for the typical unemployment spell. We also find that this effect is stronger for those facing higher unemployment risk and weaker for older workers. ER -