Precautionary Savings- A Panel Study

A large body of theoretical literature shows that income uncertainty boosts saving. Although the theory on this issue is well established, empirical work is incomplete. This paper tests for the precautionary motive for saving using panel data. Knowing the extent of the precautionary motive is important for gauging the responsiveness of saving to government programs that reduce income uncertainty. It is also important for tax and transfer policy to determine the strength of the precautionary saving motive relative to other motives, like bequests or saving for retirement. Most empirical studies that address issues related to precautionary saving use either aggregate time-series or cross- sectional data, but neither type of data can capture the effects of individual income uncertainty. I use measures of income uncertainty. I use measures of income uncertainty derived from panel data--the National Longtitudal Survey of Labor Market Experience-- and find evidence of a strong precautionary motive for saving.