Association for Public Policy Analysis & Management

Families experience income and expense volatility when their cash inflows and outflows fluctuate over time, often in unpredictable ways. Volatility makes saving and asset-building difficult, particularly for low- and moderate-income (LMI) households, where one car accident or high-interest loan can create a cycle that potentially leads to unemployment or a family spiraling into debt. This issue is of pressing concern to policymakers as issues with income and expense volatility may grow worse in the future. The rise of the gig economy, for example, may make incomes less predictable and leave households more vulnerable to expense shocks.

This paper presents work that measures the self-reported prevalence and causes of income and expense volatility among a large sample of LMI households. The analysis draws from a longitudinal national survey of LMI households. The first wave of the survey was administered immediately after these households filed their taxes (n=20,728) and the second wave was administered six months later (n=9,556). Using an array of descriptive methods, this paper investigates how an array of household and financial characteristics correlate with this volatility, the various motivations for volatility, and how volatility various by geography. This work also examines the impact of volatility on household well-being by exploring the relationship between volatility and indicators of distress like material hardships, health care hardships, food insecurity, and the use of high-cost short-term loans.

Consistent with other survey findings, roughly one-third of respondents reported moderate or high month-to-month income volatility over the prior six months. However, contrary to some other work, volatility is found to affect low-income people at similar levels regardless of race, age (at least through middle age), gender, marital status, education, or geography. This work also finds that as the level of income volatility increases, the degree to which LMI households are buffered against future volatility—as measured by their access to liquid assets, emergency funds, and credit—declines. Thus, past and present volatility may bring with it increased vulnerability to future volatility.

In terms of the impact of volatility on household well-being, preliminary results also indicate that the experience of income or expense volatility at the time of the first survey is an extremely strong predictor of experiencing an array of different household hardships six months later, including skipping medical care or other essential bills like rent, and going without the necessary amount of food. Similarly, preliminary results also find very strong relationships between both current income and expense volatility and the future use of high-cost alternative financial services (e.g. payday loans, check cashers).

These findings have wide-spread implications for further research and, ultimately, policymaking, including public benefit design, regulation of high-cost, short-term loans, and labor market rules around predictable scheduling. As policymakers debate issues that impact household financial volatility, including weakening health insurance requirements and cutting job training programs, and as general macroeconomic trends point to increased indebtedness creating a consistent drain on household incomes, understanding the problem of volatility and how to address it will be of the utmost importance in the coming years.