Accessorizing. The Effect of Union Contract Renewals on Consumption

TLDR: In this article, the authors 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).

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.

Figures

Table 11. The e¤ect of wage increases on total consumption and food expenditures, robustness

Table 6. The e¤ect of wage increases on clothing & shoes subcategories

Figure 4. An illustration of a contract renewal

Table 15. The e¤ect of wage-increases on clothing & shoes and on durables, liquidity constraints

Table 7. The e¤ect of wage-increases news on total consumption and food expenditures

Table 2. Aggregate sectors of activity, weights, and national union contracts Sector of activity Weight Contract

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Temi di Discussione
(Working Papers)
Accessorizing. The effect of union contract renewals
on consumption
by Effrosyni Adamopoulou and Roberta Zizza
Number
1024
July 2015

Temi di discussione
(Working papers)
Accessorizing. The effect of union contract renewals
on consumption
by Effrosyni Adamopoulou and Roberta Zizza
Number 1024 - July 2015

The purpose of the Temi di discussione series is to promote the circulation of working
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ACCESSORIZING: THE EFFECT OF UNION CONTRACT RENEWALS
ON CONSUMPTION
by Effrosyni Adamopoulou and Roberta Zizza*
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 to examine how
household consumption responds to different kinds of positive income shock (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 excessive 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, with expenditure on clothing and shoes increasing on 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 spending on strictly
durables.
JEL Classification: D12, E21, J51.
Keywords: union contracts, consumption, permanent income hypothesis.
Contents
1. Introduction .......................................................................................................................... 5
2. Institutional setting .............................................................................................................. 8
3. Empirical strategy .............................................................................................................. 10
4. Regression analysis ............................................................................................................ 13
5. Robustness and mechanisms ............................................................................................. 19
6. Conclusions ....................................................................................................................... 25
References .............................................................................................................................. 27
Tables and figures................................................................................................................... 33
___________________________
* Bank of Italy, Directorate General for Economics, Statistics and Research.

Frequently asked questions

Q1. What are the contributions in this paper?

In this paper the authors use information on monthly wage increases set by collective agreements in Italy and exploit their variation across sectors and over time to examine how household consumption responds to different kinds of positive income shock ( regular tranches versus lump-sum payments ). 

Q2. What are the future works in this paper?

However, expenditures on clothing & shoes, that account for a small fraction of total 19There is not enough information in the SHIW in order to study conspicuous consumption. This behaviour can be due to bounded rationality as consumers do not regard the lump-sum as part of the overall wage in ation adjustment. Their ndings suggest that policies that take the form of a lump-sum payment may have di¤erent e¤ects than policies of equal overall size that are implemented through regular smaller payments.