Response of consumers to wage shocks in the framework of the Portuguese assistance program

Nuno Alves (), Fátima Cardoso () and Manuel Coutinho Pereira ()
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Nuno Alves: Banco de Portugal
Fátima Cardoso: Banco de Portugal
Manuel Coutinho Pereira: Banco de Portugal

Portuguese Economic Journal, 2025, vol. 24, issue 1, No 2, 5-33

Abstract: Abstract This paper studies the impact on consumption of the exogenous changes in public wages in Portugal during and after the economic and financial assistance program (2011-2014), by exploiting the variability in the size of such changes across municipalities. The initial wage cuts triggered a marked reduction of private consumption, while the reinstatements in the later years gave rise to an increase, albeit of a smaller magnitude. The consumption response was larger for employees with relatively lower wages. Households smoothed the impact on consumption of negative income shocks partly by drawing down their deposits. Consumer credit did not play such a role, as households deleveraged as a response to those negative shocks.

Keywords: Wage shocks; Positive and negative shocks; Household consumption response; MPC heterogeneity; E21; E62; E65 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10258-024-00254-9

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