The gig economy and your paycheck
the concert economy grows. Before the pandemic, 3 out of 10 Americans had more than one job. People are now much more likely to have multiple jobs, work on multiple projects, or have an irregular job. Although the total income of workers has not changed much, it increasingly consists of payments.
What happens when you get smaller paychecks at a higher frequency rather than larger paychecks at a lower frequency? Previous research suggests that getting paid more often will make your consumption no longer distributed, but surprisingly, little is known about spending levels. In a perfectly rational world, and assuming your total income is the same, frequency of payments shouldn’t make a difference to expenses. In the real world, however, getting paid more frequently could also reduce expenses, as purchases made from a small jar of silver should seem more expensive than those made from a large jar. Or maybe the opposite will happen? Popular wisdom and anecdotal evidence can support either theory.
How frequency of payments affects spending levels
It’s here that new searchh by Wendy De La Rosa and Stephanie Tully, published in the Journal of Consumer Research, between.
To find answers, the researchers analyzed more than 5 million bank transactions from more than 30,000 consumers at a US bank. Their data included both credits (income) and debits (expenses). Statistical models show that the frequency of payments is an important indicator of total expenditure. Both the number of expenses and the amount of expenses increase with a higher payment frequency. In their models, getting paid every working day instead of once a week results in an increase in monthly expenses of around $ 20.
Unfortunately, correlations in banking transactions don’t tell us much about causation. To come closer to understanding causation, De La Rosa and Tully needed to conduct experiments. Most of these involved online life simulations in which participants were paid more frequently (eg daily) or less frequently (eg weekly). They were then faced with a series of decisions with a more expensive option (eg an expensive pair of jeans) and a cheaper option (eg a cheap pair of jeans). The results show that participants who were paid more frequently chose the more expensive options much more often and spent more money on average (20% and 10% more, respectively, in one of their studies) .
The role of uncertainty in predictions and perceptions of wealth
Why is this happening? The authors note that
compared to those with higher payment frequency, those with lower payment frequency experience larger and more frequent daily declines in their overall resource levels, as spending is very frequent with no income to compensate for it. . For example, a consumer with a weekly payment frequency typically experiences an increase in resources four times per month and a decrease in resources every other day when there is an expense, resulting in a general pattern of resource decumulation. In contrast, a consumer with a daily payment frequency will experience smaller and less frequent daily resource declines as their income compensates for expenses as they arise.
These differences affect the way consumers perceive their financial resources – that is, their subjective perceptions of wealth. To test this hypothesis, the researchers asked participants about subjective perceptions of wealth (eg, “Based on your experience in life simulation, how often did you feel like you had more than enough money? “) and the uncertainty of the predictions” (eg “My daily income and expenses made it difficult to predict whether I would have enough money throughout the simulation”). Their studies show that getting paid more frequently is associated with less uncertainty about having enough money to cover future expenses, which makes consumers feel like they have more than enough money, which leads ultimately to higher expenses.
The relationship between frequency of payments and expenditures is not due to differences in objective levels of wealth. According to the results of an additional experiment, the effect persists even when those with lower payment frequency are objectively richer. Finally, the fact that participants did not have a choice in their payment frequency does not explain the result either. The latest experiment reported by the researchers made access to a higher payment frequency optional and participants had to request additional paychecks. Those who chose to be paid daily still spent more than those who did not.
Questions for the future
The results of this work raise interesting questions.
The authors of the article speculate on how the frequency of payments might affect other types of behavior, such as saving. Since a greater frequency of payment reinforces the subjective feeling of wealth, this could lead to higher savings, but this could be offset by the increased spending which is also associated with being paid more often.
It would also be interesting if future surveys analyze cross-national data. While salaried workers in the United States are traditionally paid at least once every two weeks, most European employees are paid monthly. It would be difficult to also account for all the other variables that affect spending, but it might be useful to conduct further studies to see if the effect of frequency of payments on spending is also evident due to the different benefit regimes. payment.
The practical implications
The most important question raised by the research concerns the practical implications. How can we help people who get paid often avoid spending more than their peers who get paid less? The most obvious answer is to encourage consumers to switch to less frequent paychecks if they have the choice.
Financial institutions could also help consumers by encouraging consumers who get paid frequently to consolidate their debit transactions (expenses) into fewer days. This would promote a feeling of disbursement of resources, as expenses would no longer be matched as much by income. It would also serve as self control device for consumers, as they must maintain sufficient resources to cover larger (but less frequent) daily expenses.
A final means of influencing behavior that is frequently used by behavioral economists concerns access to information and the importance of information. The frequency with which you see information about financial transactions and the attention you pay to different types of information affect your financial decisions. Would consumers who are frequently paid and less exposed to their bank account transactions still spend much more than those who are paid less often? Much useful research could still be done to help consumers break the link between payment frequency and spending.