THE TIMING OF WHEN WE’RE PAID AND WHEN WE SPEND

Households whose main earner’s payday comes round monthly rather than weekly spend 5-6% more on meals and entertainment in each of the two weeks after being paid. What’s more, such fluctuations in consumer spending are much more pronounced for households with no asset income and for younger households.

These are among the conclusions of new research by Professor Melvin Stephens, published in the July 2006 issue of the Economic Journal. His study analyses data from the UK’s Family Expenditure Survey (FES) to examine the links between when people are paid and the timing of their household expenditures.

Expressions such as ‘I’m broke until I get paid again’, ‘I’ll pay you with my next paycheque’ and ‘I’m living payday to payday’ are quite common. These phrases may be uttered by people struggling to pay their monthly bills after an unexpected expense. In such situations, access to low-interest short-term loans may be a useful policy remedy.

But they may also be said by people who are consistently unable to plan their expenditures adequately and who see their consumption drop precipitously between paydays. Policy recommendations are less clear here since they may border on forms of paternalism such as forced savings plans or changing the frequency with which workers are paid.

Standard economic theory, however, rules out such behaviour. Rather, households that are rationally foresighted ‘smooth’ their consumption over time, which means that planned consumption fluctuations are ruled out. Since paycheques arrive at regular intervals and typically do not vary from one payday to the next, consumption should remain smooth when between paycheques.

This study examines whether there is a link between the receipt of a paycheque and timing of household consumption expenditures. Using the UK’s FES, it finds that households that are paid on a monthly basis increase their expenditures by over 14% in the week immediately following the receipt of their paycheque and spend nearly as much in the following week.

Of course, some of this increased spending is due to planned periodic payments such as rent, mortgage payments and utility bills. When focusing on ‘instant consumption’ – meals and alcohol away from home, fresh foods and entertainment expenses such as cinema, concerts and spectator sports – the study finds that consumption increases between 5-6% during the week of paycheque receipt as well as the following week.

Although primarily focused on households paid monthly, the study also looks at households paid weekly. The analysis finds that weekly paid households do not exhibit any consumption fluctuations over the month. These findings further confirm that the monthly consumption cycle found for monthly paid households is due to paycheque receipt rather than some other factor that varies over the month.

The analysis also looks at consumption fluctuations across various sub-groups. These are much more pronounced for households with no asset income than for households in the top 25% of the asset income distribution. The fluctuations are sharper for younger households – those where the main earner is under 40 years of age – than for more mature households.

The data used in this study is the UK’s FES, which collects household expenditure information in the form of two-week expenditure diaries that are given to each household member. Survey respondents are instructed to record all expenditures made during this two-week period in their diary.

The FES also collects a wide range of detailed information on household members at the beginning of the two-week period, including demographic and labour force data. Household members that are engaged in the labour market are asked information including the amount and the date of their last paycheque. This information is used to determine whether or not the household has been paid during the diary period.

ENDS

Notes for editors: ‘Paycheque Receipt and the Timing of Consumption’ by Melvin Stephens is published in the July 2006 issue of the Economic Journal.

Melvin Stephens is at the Heinz School of Public Policy and Management at Carnegie Mellon University and a faculty research fellow at the National Bureau of Economic Research.

For further information: contact Melvin Stephens on +1-412-414-8367 (email: mstep@cmu.edu); or Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).