Some Low-Hanging Fruit for Government Policy: Paying Benefits and Wages to Low-Income Folks Weekly
What I learned today at the NBER Summer Institute was that there is a monthly cycle in many key outcomes for folks being helped by the Supplemental Nutrition Assistance Program. The week they get their monthly payment, they seem to do something that makes them crash in week two. Then some outcomes are not so good in weeks three and four. All of this is needless. Given that most benefits are now distributed by debit card, it would be easy to pay out benefits weekly instead of monthly to help people smooth their spending—and I suspect, to spend on better, higher priority things, since the budget constraint would be clearer and easier to understand—in part because of the repetition every week of the same budget constraint. Of course, if everyone were a perfect maximizer, paying benefits out weekly instead of monthly would make very little difference. But people aren’t perfect maximizers.
I am struck by how easy a policy this would be to change. Think of other things activists are successfully working on. And it might not require any of the usual activism. A few economists working in the Department of Agriculture (which administers the Supplemental Nutrition Assistance Program) might be able to make this happen by talking to their bosses.
Running into a friend on the way to the swimming pool after the conference day was over, I also learned that there are some papers suggesting that low-wage workers do better getting paid weekly rather than monthly as well. That also seems like something the Department of Labor could make happen at a lot of firms by gentle encouragement. And a few economists in the Department of Labor could probably get the ball rolling on more frequent paychecks for low wage workers.
The idea of frequent disbursement of wages is an old idea, though in more extreme form. Deuteronomy 4:14-15 in the Law of Moses, says:
Do not take advantage of a hired worker who is poor and needy, whether that worker is a fellow Israelite or a foreigner residing in one of your towns. Pay them their wages each day before sunset, because they are poor and are counting on it. Otherwise they may cry to the LORD against you, and you will be guilty of sin.
Modern evidence backs up the wisdom of this principle that those with low incomes are typically better off getting money for basic needs frequently, rather than in large lump sums. There can be other provision for helping people get micro loans at reasonable rates for big things, but that might be more at the annual frequency. Perhaps weekly payments or wages and one substantial annual payment or bonus might be the optimum.
If you know of references on this, link to them in the comments!