Association for Public Policy Analysis & Management

Panel: The Role of Income Volatility in Family Economic Security: Evidence and Policy Implications

(Poverty and Income Policy)

The balance sheets of American households are showing modest improvement, as are people’s attitudes about their financial health. The Census Bureau reported that median household income increased by just over 5 percent from 2014 to 2015. Further, more Americans report feeling financially secure, and fewer say they are unprepared for the unexpected.

Yet, problems persist: For many families, household income is not steady. Fluctuations can occur in planned and unplanned ways. For example, marriage and childbirth can change the income structure of a household. Similarly, retirement or diminished work hours change the inflows of money into a home, and spikes can occur as a result of a bonus, a tax refund, or a promotion.

Recent work by the U.S. Financial Diaries and JPMorgan Chase Institute has found that many families face significant income changes over time. Such fluctuations, also called income volatility, matter because among the many factors that inhibit household financial stability, large income swings may make it challenging to plan and budget and may leave families feeling less financially stable.

The first paper, “How Income Volatility Interacts with American Families’ Financial Security: An Examination of Gains, Losses, and Household Economic Experiences,” will provide an overview of year over year income volatility and its implications for family financial security. While income losses have been detailed in the past, this paper also explores income gains experienced by households, and indicates that households that experience income volatility—whether up or down—report lower financial well-being and have less money saved than their counterparts with stable income.

The second paper, “Income and Expense Volatility in the 2016 Household Financial Survey,” highlights new data on the incidence of monthly income volatility among low- and moderate-income tax filers. The findings support other research in the field, but also expand our knowledge about the demographic profile of those most affected by volatility and the potential links between volatility and use of alternative financial services like payday loans.

The final paper, “Income Volatility in the Service Sector: Contours, Causes, and Consequences” details the prevalence of week-to-week income volatility among service sector workers. Using both survey and qualitative data, the paper draws conclusions about the effect of volatility on family finances and other measures of family wellbeing.

Together, these papers illustrate the difficulties families face when combatting income volatility, including difficulty saving and trouble paying bills. These financial realties are particularly concerning given the advent of a more mobile workforce, the uncertainty many workers face with their hours and benefits, and the changing employer-employee relationship which shifts benefit costs and risks from employers to employees.

The transmission of family income into family wealth and well-being is well documented in the research. These papers contribute to the field by detailing the difficulties families face when combatting income volatility. Further, the papers draw from rich data that are used here to spur an important discussion around solutions. Discussions around these topics can help inform future research avenues and program design to support greater income stability and household financial well-being.