Even those with long-term, “steady” jobs cannot count on financial stability because of the volatility and unpredictability of their incomes and expenses. As workers have taken on more risk—risk that they are unprepared to manage effectively—society has paid the costs: reinforcing rising inequality and declining mobility. These costs are now visible and undeniable. Steps to tackle them are clear. Will we have the courage to act?
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If it was ever true that “a rising tide lifts all boats” in an economic sense, it is clearly not true in modern America. Since 1980 half of Americans have been stuck in place—their wages in real terms haven’t budged—while the top 20% have seen large gains.
Rising inequality of income and of wealth undermines much of the narrative about opportunity in America—that it’s a country where anyone can pull themselves up by their bootstraps. In fact, today the U.S. has a lower rate of intergenerational economic mobility than France, Germany, or even Sweden.
Another form of economic inequality has been rising as well. Though it’s garnered less attention, it undermines not just families’ dreams for their children but hopes for their own lifetimes. It’s the gap between people with financial stability and those without it.
Our research has found that even those with long-term, “steady” jobs cannot count on financial stability because of the volatility and unpredictability of their incomes and expenses. The major source of income volatility we found was due not to job changes, but to changing income from the same job. In other words, our households had steady jobs without steady pay.
Taken together, these two forms of inequality mean that some households have incomes that are the worst combination of stagnant (over decades) and volatile (on an annual and even a monthly basis).
One major source of the problem: a huge shift in risk from organizations to employees. Multiple studies have documented that firms have increasingly pushed the risk of business downturns (short-term or long-term) onto workers through labor-market innovations such as dynamic, variable schedules; increased services outsourcing; and the rise of contract work.
Progress requires employers to own up to their role in this shifting of risk, and to take steps to help workers manage risk better. And it’s not offering a financial skills course: There’s been substantial evidence for a quite a while that financial literacy programs don’t help. People facing wide monthly swings in income and expenses need more than better budgeting skills or financial literacy education. It’s nonsensical to blame people for “poor choices” or a lack of financial literacy when their volatile economic circumstances would challenge the skills of a finance MBA. For instance, people are often advised to put saving and bill-paying on auto-pilot so that they don’t miss due dates and saving becomes automatic. But that advice only makes sense when you have a predictable and stable income. When you experience large swings in income from month-to-month, “auto-pilot” is dangerous, especially when there’s little slack. Making credit card, mortgage, or rent payments in the same exact amount, at the same exact time each month is hard when everything else is unsteady. And when you don’t know if you’ll get enough hours at work to pay the electric bill this month, there’s little chance you’re going to open an IRA or a 529 plan or even set-up direct deposit into a savings account.
While boosting household financial stability for those workers and families who are struggling in the modern economy isn’t simple, there are practical steps employers could take.
One is revisiting scheduling practices. A more stable schedule means more stable income. And it’s by no means clear that “just-in-time scheduling” and volatile hours are any better for employers than they are for employees. Some employers, Walmart notably among them, are already taking steps toward more scheduling stability and predictability. If employers don’t act on their own, regulators may force them to. San Francisco, Seattle and New York are leaders in enacting requirements that workers can choose a more predictable and stable work schedule, but they are not the only cities taking action. Building on the model of the proposed federal Schedules That Work Act, some advocates are also proposing that employees with caregiving responsibilities or who are enrolled in education programs be given even more protections. Related efforts to raise minimum wages and/or tipped minimum wages are gaining traction in many states and localities.
Employers can also play a role in helping employees deal with volatile expenses, just as they play a role in helping employees save for retirement. The Federal Reserve found that in 2016, 44% of American households didn’t have $400 in emergency savings. Employers could enable short-term savings alongside a 401(k), with employer-matching or even direct subsidy for both. The combination of an emergency buffer with a retirement account both lowers the likelihood of workers drawing down their retirement accounts early (often with substantial penalties) and also increases the likelihood of saving for retirement since locking up extra funds in an account with such penalties would be less daunting. The benefit for employers of workers who do not have to scramble, and even sell possessions, to cover an emergency should be obvious.
At an even more prosaic level, employers could provide employees with access to financial services tools like Even. The company’s algorithm tracks paychecks over time, noting highs and lows. When a user’s paycheck falls below average, Even offers a “boost”; when a paycheck is higher than average, the customer repays the “boost” and is offered the chance to save. A critical but subtle part of Even’s business model is that it charges a subscription fee, meaning it generates profit when people stick with the service. Unlike credit card providers or payday lenders, Even has no incentive to keep customers in debt. Its business is smoothing, not lending. This would be a help to the families like the ones in our study, low- and moderate-income American families who often had to juggle bills, skipping payments in some months and then doubling up when their income peaked—ultimately paying more than they would have if they could set up automatic payments and make long-term financial plans. Households like these often turn to expensive debt in an attempt to manage the spikes and dips, which can create even more problems. Were employers to subsidize a service like Even for their employees with the most variable schedules (often, also the lowest-paid employees), it would be an important step in shifting risk.
Since at least the 1980s, power has been shifting markedly toward employers. It’s not surprising that the consequence has been a steady shift of risk onto employees. As workers have taken on more risk—risk that they are unprepared to manage effectively—society has paid the costs: reinforcing rising inequality and declining mobility. These costs are now visible and undeniable. Steps to tackle them are clear. Will we have the courage to act?
More Info: hbr.org
Categories: Money Matters