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Regular versus lump-sum payments in union contracts and household consumption

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  • Zizza, Roberta
  • Adamopoulou, Effrosyni

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. JEL Classification: D12, E21, J51

Suggested Citation

  • Zizza, Roberta & Adamopoulou, Effrosyni, 2017. "Regular versus lump-sum payments in union contracts and household consumption," Working Paper Series 2013, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172013
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    3. Guillermo Cabanillas-Jiménez, 2021. "Testing the Permanent Income Hypothesis using the Spanish Christmas Lottery," Studies in Economics 2104, School of Economics, University of Kent.

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    More about this item

    Keywords

    bounded rationality; consumption; permanent income hypothesis; union contracts;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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