Working Paper: CEPR ID: DP10680
Authors: Tullio Jappelli; Mario Padula
Abstract: In 2000 Italy replaced its traditional system of severance pay for public employees with a new system. Under the old regime, severance pay was proportional to the final salary before retirement; under the new regime it is proportional to lifetime earnings. This reform entails substantial losses for future generations of public employees, in the range of ?20,000-30,000, depending on seniority. Using a difference-in-difference framework, we estimate the impact of this unanticipated change in lifetime resources, on the current consumption and wealth accumulation of employees affected by the reform. In line with theoretical simulations, we find that each euro reduction in severance pay reduces the average propensity to consume by 3 cents and increases the wealth-income ratio by 0.32. The response is stronger for younger workers and for households where both spouses are public sector employees.
Keywords: consumption; income shock; severance pay; wealth accumulation
JEL Codes: D12; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| severance pay reform (J65) | average propensity to consume (E21) |
| severance pay reform (J65) | wealth-income ratio (D31) |
| severance pay reform (J65) | wealth increase (D31) |
| severance pay reform (J65) | average propensity to consume (public employees) (J45) |