Purpose: This study aims to empirically test the precautionary saving theory in Algeria using macroeconomic time-series data covering the period from 1974 to 2014. According to this theory, an increase in income uncertainty is expected to increase saving and reduce consumption.
Method: This study adopts an applied, empirical-analytical research design. Income uncertainty was assessed using two indicators: the unemployment rate as a simple indicator and conditional variance as an advanced indicator, calculated based on the methods proposed by Hahm (1999) and Menegatti (2007, 2010). The effects of these indicators on consumption and saving were estimated using two econometric methods: two-stage least squares (2SLS) and the generalized method of moments (GMM).
Results: The results show that increased income uncertainty has a positive and statistically significant effect on saving and a negative effect on consumption; therefore, the macroeconomic data for Algeria support the precautionary saving theory. In contrast, the unemployment rate had no statistically significant effect on consumption, and its effect on saving was also inconsistent with the predictions of the precautionary saving theory. The findings also show that the permanent income–life-cycle hypothesis does not adequately explain consumption behavior in Algeria, whereas the results are consistent with the Keynesian consumption theory. Social security benefits also had a positive and statistically significant effect on consumption, while social security contributions had no statistically significant effect on either consumption or saving.
Conclusion:The results indicate that income uncertainty, rather than the unemployment rate, is an important factor in explaining household consumption and saving behavior in Algeria. Therefore, reducing income uncertainty by strengthening social security and insurance coverage and providing appropriate incentives for participation in pension schemes may help reduce the need for precautionary saving and strengthen long-term saving. These findings may also contribute to a better understanding of certain economic phenomena in Algeria, including the low participation of workers in the pension system.