Italian MPCs declined post-Covid, employment shifts weigh on aggregate
A Banca d'Italia paper finds Italy's marginal propensity to consume (MPC) declined in the post-Covid recovery, driven by employment growth concentrated in low-MPC households. The study assesses the decoupling between consumption and income from 2016 to 2024.
Consumption's post-Covid puzzle
The Banca d'Italia paper investigates the observed decoupling between household consumption and disposable income in Italy following the COVID-19 crisis, despite robust labor market outcomes.
Between 2019 and 2025, real consumption expenditure increased by 2.4 percent, while disposable income rose by 3.1 percent, indicating a weakening relationship between spending and income.
The study finds that marginal propensities to consume (MPCs) declined across all household groups, on average, reflecting a broad-based reduction in spending propensities.
Furthermore, recent employment growth, primarily driven by secondary earners, was concentrated among households with structurally lower MPCs.
These include households headed by individuals aged 55 or over and those with tertiary educational attainment.
This compositional shift exerted significant downward pressure on the aggregate MPC, with projections suggesting this effect continued through 2024.
Disentangling the drivers
To understand these dynamics, the researchers employed a four-step methodology.
First, they analyzed employment patterns using the Italian Labour Force Survey to identify demographic groups driving labor market expansion.
Second, household MPCs were modeled using Banca d'Italia's Survey on Household Income and Wealth (SHIW) for 2016 and 2022, allowing for heterogeneous MPCs across groups.
Third, the aggregate MPC was computed as a weighted average of subgroup-specific MPCs.
Finally, changes in the aggregate MPC were decomposed into a behavioral component and a composition-income component using an Oaxaca–Blinder-type method, clarifying the role of shifts in income and employment distribution.
Beyond simple spending habits
This research provides crucial clarity on Italy's post-pandemic consumption dynamics, moving beyond simple behavioral shifts to highlight structural factors.
By disentangling aggregate and compositional effects, it underscores how evolving labor market demographics significantly influence overall spending.
For policymakers, this implies that stimulating aggregate demand may require more targeted interventions than previously assumed.