Accessorizing. The Effect of Union Contract Renewals on Consumption

61 Pages Posted: 20 Jan 2016

Date Written: July 21, 2015

Abstract

In this paper we use information on monthly wage increases set by collective agreements in Italy and exploit their variation across sectors and over time in order to examine how household consumption responds to different types of positive income shocks (regular tranches versus lump-sum payments). Focusing on single-earner households, we find that the Permanent-Income Hypothesis holds empirically, since total and food consumption do not exhibit excess sensitivity to anticipated income shocks. Consumption does not respond at the date of the announcement of income increases either, as these are known to compensate workers for the overall loss in their wages' purchasing power. We also find, in line with the Permanent-Income Hypothesis, that consumption responds, but only a little, to transitory and less anticipated shocks, as the expenditures on clothing & shoes increase upon the receipt of the lump-sum payments. This finding can be interpreted as a "signaling-by-consuming" behaviour given that these goods represent conspicuous consumption. There is also some weak evidence of the existence of liquidity constraints regarding expenditures on strictly durables.

Keywords: union contracts, consumption, permanent income hypothesis

JEL Classification: D12, E21, J51

Suggested Citation

Adamopoulou, Effrosyni and Zizza, Roberta, Accessorizing. The Effect of Union Contract Renewals on Consumption (July 21, 2015). Bank of Italy Temi di Discussione (Working Paper) No. 1024. Available at SSRN: https://ssrn.com/abstract=2718337 or http://dx.doi.org/10.2139/ssrn.2718337

Effrosyni Adamopoulou

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Roberta Zizza (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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