The Effect of Unemployment on Household Consumption in Iran

A variety of studies have examined the determining factors of household consumption, demonstrating that the most prominent factors are income expectations, socio-economic characteristics, and borrowing constraints of the household. However, the effect of spontaneous unemployment on household consumption is very important from welfare perspective: because a proper social security system can eliminate its adverse impacts. The question that we investigate in this study is how the consumption level of Iranian households, ceteris paribus, react to the shock of getting unemployed. To answer this question, we have created a panel data based on "Household Income and Expenditure Survey" by Statistical Center of Iran. Then, controlling for other factors, a difference in difference method is employed to evaluate the effect of a change in employment status of household head on household consumption. The results show that lower income households who experience unemployment of their heads significantly decrease their level of consumption. This result demonstrates a weakness of the country's social security system; for if it was efficient, unemployment shocks would not have such significant effect on consumption.