With all of the attention on the “gig economy” and the future of work in the U.S., income volatility—the idea that workers today are not only seeing their wages stagnate, but also fluctuate more than ever before—is now coming to be viewed as a key component of financial security. The U.S. Financial Diaries project pushed our understanding of this challenge forward with its groundbreaking research into the day-to-day economic lives of Americans living on the financial edge. The JPMorgan Chase Institute harnessed its unrivaled access to “big data” to paint a similar picture of unstable income and consumption among its customer-base. And new surveys from the Pew Charitable Trusts and the Federal Reserve corroborate the story.
But many questions remain. Who is most affected? What is driving the trend? What is the effect on families?
The Aspen Institute’s Financial Security Program has begun to build the evidence base to answer these questions through a process called the Expanding Prosperity Impact Collaborative, or EPIC. Literature suggests that the labor market drives much of the volatility, especially irregular schedules for hourly workers. Volatility seems to hit younger, single-parent families of color harder than others. And while volatility makes it harder to manage cash flows and can trigger demand for high-cost financial credit products, it also has serious effects on the health and education outcomes of children. Income volatility undermines every investment in education, public health, and economic development, chipping away at what would otherwise be positive returns.
But what about the impact of volatility on communities, states, regions, or the country? Preliminary results from a survey EPIC administered in early 2016 suggest that experts in the field are not confident about the answer. Some cited more income inequality and slower macroeconomic growth as the most troubling potential impact, while others mentioned intensified social immobility and racial inequality.
All the answers were based on speculation—valiant attempts to “connect the dots” with how other financial challenges create macro effects. That’s because there was little to no research on these community-level effects. Now, however, new research from the Urban Institute clearly shows a connection between family financial instability and the economic health of cities.
Urban’s key finding is that families facing one of three income disruptions—an involuntary job loss, a health-related work limitation, or an income drop of 50 percent or more—are more likely to be evicted, miss housing and utility payments, and receive public benefits. Obviously, these results have ripple effects on city budgets and community development. Property tax revenue will dip if families struggle to make mortgage payments; social service budgets will surge if families need public assistance to find affordable housing or replace lost wages; and cities with publically owned utilities will take a financial hit when their citizens miss payments.
The only way to avoid these outcomes is by investing in family financial security. The Urban Institute highlights the effectiveness of saving as an antidote to income disruption, and many researchers have echoed that sentiment. For example, mortgage reserve accounts, which allow low- and moderate-income first-time homebuyers the chance to accumulate emergency savings while building equity in their home, are a promising, behaviorally informed tool for ensuring that young families don’t get out over their financial skis.
But community-wide problems—whether it’s the foreclosure crisis or a public health epidemic—demand community-wide solutions. One larger-scale way to combat the ill effects of volatility is smarter affordable housing that produces stability—safe neighborhoods, flexible rent schedules, easy recertification processes, and accessible job opportunities. Modernizing public benefit programs so that they are responsive to the rapid income changes families experience are critical, too. A few cities, including San Francisco, are also testing how labor-market regulations can be leveraged so workers know when their next shift will be, which would allow them to make child care arrangements, go back to school, or pick up extra hours at their second job. As the Urban Institute research shows, government jurisdictions will be better off if they are inhabited by citizens who know how large their next paycheck will be, and have the tools to handle the inevitable swings.
Building a research and policy agenda around a new and emerging issue in consumer finance is no easy task. But the urgency and persistent nature of the income volatility problem demands cross-sector, innovative thinking. If not dealt with, it could undermine not only individual households, but also communities, cities, and regions.