Regular versus Lump-Sum Payments in Union Contracts and Household Consumption

55 Pages Posted: 5 Feb 2017

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Abstract

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 evidence of consumption smoothing in accordance with the Permanent-Income Hypothesis, since total and food consumption do not exhibit excess sensitivity to anticipated regular payments. 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. However, consumption responds, albeit a little, to transitory and less anticipated one-off payments, as the expenditures on clothing & shoes increase upon the receipt of the lump-sum payments. This behaviour is consistent with bounded rationality as consumers do not consider the lump-sum as part of the overall wage inflation adjustment.

Keywords: union contracts, consumption, permanent income hypothesis, bounded rationality

JEL Classification: D12, E21, J51

Suggested Citation

Adamopoulou, Effrosyni and Zizza, Roberta, Regular versus Lump-Sum Payments in Union Contracts and Household Consumption. IZA Discussion Paper No. 10509. Available at SSRN: https://ssrn.com/abstract=2911407

Effrosyni Adamopoulou (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Roberta Zizza

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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