The Impacts of Predictable Income Volatility and Income Risk on Economic Outcomes and Behaviors

University Of Southern California, Los Angeles CA

Investigators

Abstract

The income of poor people is not only low, but also unstable and unpredictable. Despite this income instability and its potential costs on the wellbeing of the poor, economists, measure of the effects of this instability and unpredictability is limited. This research will use field experiments to study how income instability affects the economic behavior and wellbeing of the poor. The project involves experimentally manipulating the labor demand for casual work of low wage labor during a period when little other work is available and then study the impact of income instability on consumption, savings, investment other activities as well as investigate the strategies households use to cope with income instability. The research will also collect data on individuals perceived costs of income instability to measure their willingness to pay to avoid income instability. The project will provide evidence on the importance of stabilizing incomes as a policy goal. The results of this research will provide guidance on labor market policies that will improve the lives of low-income workers. In so doing, it will help to establish the US as a global leader in improving the living standards of low-income workers. This research will study the causal effects of income risk and of predictable income volatility on economic outcomes and on welfare. To generate exogenous variation in income instability, the PIs experimentally manipulate the labor demand for casual work during a time when there are no alternatives. The RCT design has three arms: the Stable (S) arm has fixed pay scale and workdays; fluctuations in pay scale and workdays in the Predictable Volatility (PV) arm will be known in advance to workers while fluctuations in pay scale and workdays in the Risky Income (RI) arm will be unknown to the workers. The expected, number of workdays and pay of all three arms will be the same. Besides baseline data, high frequency panel data on consumption, expenditures, income, savings and assets, loans and debt, and transfers will be collected. The design and empirical analysis will allow the PIs to study the impact of income instability on consumption levels and smoothing and to investigate in detail the strategies used to cope with income instability. In addition to reduced-form analyses, the research will estimate a structural model to conduct a welfare analysis and simulate policy counterfactuals. The PIs will measure the perceived welfare costs of income instability by eliciting individuals’ willingness to pay to avoid predictable income volatility. The PIs will use the structural model to shed further light on mechanisms, to estimate the welfare costs of income instability, and to simulate policy counterfactuals. The results of this research will help guide labor market policies that stabilizes worker incomes and thus improve the living standards of the working poor. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.