Summary
This week’s summary about an article with regression concerns an article that seems to seek the negative and positive implications on consumer spending in the period of unemployment. In this article, the research question is, “What are they implications (whether positive or normative) that are associated with consumer spending during unemployment?” Another research question associated with the paper is, “how does consumer spending evolve during an employment spell?” the author seeks to understand what happens when the employment rate lowers. Does the consumption increase, decrease, or even remain the same? From an economic point of view, it is expected that unemployment will trigger a reduction in the level of income. Due to the above fact, it is expected that households will not have enough money to attain the desired and previously attained bundle of goods in the previous budget line; therefore, reduction in consumption is more likely.
One of the main methods used in research is papers is the hypothesis test. In this, formulation of to be proved statements regarding the research is key, proving come on later as the statements are either valid or invalid. The article is not exceptional to this. The hypothesis related to the research question is that unemployment is related to total consumption, and an increase in unemployment decreases the level of aggregate spending. Although this is a statement that is yet to be proved, most economists would argue that as the truth because of several consumer behavior theories such as rational and behavioral models. The two theories provide that consumers are rational in the way they think and act. They shift their actions to services and goods of more preferences and are consistent. If the income level decreases, they are ready to consume less or no of the less preferred commodities.
Explaining consumption behaviors among rational and consistent thinkers is not an easy task. One must admit that several assumptions must be met to reach that. Several theories try to explain the behavior, too; most of them claim that consumption expenditure is negatively affected by the increased unemployment rate. As an economist, that’s a rational thought; this is because unemployment goes hand in hand with a reduced income level. With reduced income, resources available for consumption are indeed reduced; due to the reduction, consumers cannot afford the previous consumption bundles, which will lead to a reduction in consumption. Other theories state that consumer consumption will depend on previous bundles consumed regardless of the level of income. John Keynes argued that relative income determined the level of consumption where consumers look for external funding when their income reduces. However, this is to be proved by the outcomes of the research.
The article’s work is based on existing data in a specific bank, which gives information about unemployment and the associated income alterations. Analysis of the data and comparisons to other economic periods is the main reason behind answering the research question and proving the hypothesis. The data available accounts for both independent and dependent variables. In this case, consumer spending comes out as the dependent variable, and the level of income, the unemployment rates, assets, and liabilities, are the independent variables. After collecting data that concerns 27 million households in some states in the United States, the analysis is based on the formulation of the ordinary least square method, which explains the relationship between the dependent and the independent variables.
As might have been expected, the aggregate spending was seen to decrease at onset and exhaustion. The results had it that unemployed led to low-income levels, which provided a trend of reduction in spending during the months of study. The results were significant, and one could easily comply with them as they had backups from other authors and economists such as classical economists. They argued that income and employment levels are what determines the level of consumption of households. A decrease in either of the two would lead to a significant decrease in households’ level of spending. The research outcomes are clear implications of the stated hypothesis and answers to the research questions; the author was very accurate to have found results that rhyme with the expectations.