Union Contracts and the Life Cycle-Permanent Income Hypothesis

John Shea, American Economic Review 85(1), 186-200, March .


This paper isolates households in the PSID whose heads can be matched to particular long-term union contracts with high confidence. The author uses use published information on these contracts to construct a household-specific measure of expected wage growth. He finds that predictable wage movements are significantly correlated with consumption changes, contrary to neoclassical consumption theory. The author finds that consumption responds more strongly to predictable income declines than to predictable income increases. This asymmetry is inconsistent with liquidity constraints and myopia but is qualitatively consistent with models in which preferences exhibit loss aversion.

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