Unemployment, consumption smoothing, and precautionary saving in urban China

The permanent income hypothesis and life-cycle models allowing for precautionary saving suggest that households may be able to smooth their consumption by saving during normal periods or when facing high income uncertainties and dissaving when adverse economic shocks occur. These hypotheses are tested using a unique data set collected from China. Our findings indicate that Chinese urban households are capable of smoothing most consumption and have a strong motive for precautionary saving. However, we find strong evidence of an inability to smooth educational expenditure suggesting educational subsidies may be necessary to prevent further increases in income inequality in the next generation.