The labour market and economic risk: 'Friend' or 'foe'?

This paper examines the twofold role of the labour market in household economic risk management: as a source of household consumption risk, and as an instrument for insuring consumption against contingencies. It outlines a framework for analysing this twofold role of the labour market, and uses data from the British Household Panel Survey 1991-1996 to explore this empirically. It identifies the relative importance of the labour market, and other factors, in producing changes in the financial situation of individuals. It also implements 'full insurance' tests of whether unemployment and other external shocks to the household are correlated with consumption growth. It concludes that labour market factors are a dominant source of change in individuals' financial situation, with a predominantly positive effect on the financial situation of the better off, and a predominantly negative impact on the financial situation of the less well off. It also finds that households are unable to fully insure their consumption against unemployment, and that as a result labour market factors pose a significant economic risk.