No. 1024 - Accessorizing. The effect of union contract renewals on consumption

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by Effrosyni Adamopoulou and Roberta Zizza July 2015

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.

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