Economics in a picture
An unanticipated wage cut leads to a reduction in consumption which is more pronounced for lower-income households
At the beginning of the Portuguese economic and financial assistance program, wages of public sector workers fell significantly. These income shocks were not anticipated and were perceived by households as persistent. Given the heterogeneous size of the shocks in the different municipalities in Portugal, it is possible to estimate the response of consumption to the reduction in income. Taking all households into account, in the period 2011-2012, the impact of the wage reduction on consumption was 0.8% for each 1% reduction in income. After 12 months, the cumulative reduction in consumption was about half of the income variation.
The effect on consumption was larger the lower the income bracket of the workers. In the higher income brackets, the negative response of consumption was only significant on impact, while in the lower income brackets the response of consumption was persistent and of a larger 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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