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The reduction in household deposits mitigated the impact of the 2011-2012 wage cuts on consumption

26.03.2021

Economics in a picture: The reduction in household deposits mitigated the impact of the 2011-2012 wage cuts on consumption

 

 

At the beginning of the Portuguese economic and financial assistance program, wages of public sector workers fell significantly. Given the heterogeneous size of the shocks in the different municipalities in Portugal, it is possible to estimate the response of household deposits and consumer credit to the income reduction resulting from these wage cuts. 

 

The wage cuts led to a reduction in deposits up to about three months thereafter, which allowed some smoothing of their effects on household consumption. For each one euro decrease in disposable income, there was a negative response of the variation in household deposits of 57 cents in the month of impact and of 17 cents after 3 months, in cumulative terms. For longer periods, the effect was not statistically significant. In contrast, consumer indebtedness did not play a relevant role in mitigating the impact of wage cuts on consumption, in a context of highly restrictive credit conditions. In fact, the response of consumer credit was also negative, although of a very small magnitude.

 

For more details see Alves, N., F. Cardoso and M. Pereira (2020), “Heterogeneous response of consumers to income shocks throughout a financial assistance program”. Banco de Portugal Working Paper 18.

 

Prepared by Nuno Alves, Fátima Cardoso and Manuel Pereira. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

 

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