Income Volatility in Philadelphia

Too many Philadelphians experience hardship due to income volatility.

Income volatility affects roughly a third of American families; 34% experience large fluctuations from one year to another (Pew, 2017a), while three in ten adults report month-to-month volatility (US Federal Reserve, 2019). Philadelphia’s one-in-four poverty rate, the highest of the ten largest US cities, makes its residents particularly vulnerable to these financial ups and downs (Pew, 2020). Policymakers must act now to steady the ground underneath Philadelphians.

Financial Hardship and Affected Populations

Income volatility has financial consequences, even if it manifests as a gain. Affected families have less savings and are more financially burdened than those with consistent income (Pew, 2017a). Ten percent of adults report difficulty paying their bills due to income volatility, with the burden magnified for those who have less access to credit (US Federal Reserve, 2019). Those with limited savings are also vulnerable, and the portion of Americans that fall into this category is large; an unexpected $400 expense would prompt 40% of Americans to seek an avenue other than their savings to cover the gap (US Federal Reserve, 2019).

The harm caused by income volatility is by no means confined to those technically considered impoverished*; unsteady income stymies attempts at budgeting and long-term financial planning regardless of total dollars available. However, the calamity caused by financial shocks and fluctuations can be compounded for those experiencing the additional hardship of life below the poverty line. In Philadelphia, poverty disproportionately affects children, Black people, Hispanic or Latino people, disabled people, and those without a high school degree or equivalent. The U.S. Census Bureau’s American Community Survey for 2019 found an overall Philadelphia poverty rate of 23% (US Census Bureau, 2020a). Approximately a third of children under 18 are included in that group; over 100,000 Philadelphians under 18 are living in poverty (US Census Bureau, 2020a). The racial category with the highest number of people below the poverty line is Black Philadelphians at 170,000, which is 27% of this population (US Census Bureau, 2020a). Meanwhile, those of Hispanic or Latino origin are the poorest subgroup measured by the ACS with a staggering 40% below the poverty line (US Census Bureau, 2020a). By comparison, this is true for just 13% of white people not of Hispanic or Latino origin (US Census Bureau, 2020a). Those with a disability were also much more likely than their abled counterparts to experience poverty, with a rate of 36% (US Census Bureau, 2020a). Thirty-eight percent of people aged 25 and over without a high school degree fall below the poverty line as well (US Census Bureau, 2020a). Finally, substantial evidence also indicates that members of the LGBTQIA+ community are more likely to experience poverty (Badgett, Choi, and Wilson, 2019).

*This includes people who are above the federal poverty line as well as groups whose financial situations are difficult to measure. Certain populations are excluded from the US Census Bureau poverty universe, meaning they are not assigned a poverty status and therefore are not counted in the poverty rates. Those in certain unconventional living situations such as residents of elder care facilities, imprisoned people, enlisted military living in barracks, college students living in dormitories, and unhoused people not in shelters are among these omitted populations (US Census Bureau, 2020b).

Theoretical Frameworks for Understanding Income Volatility and Its Effects

Personal Responsibility and Individualism

The framework of personal responsibility centers individual traits and choices as the most important determinant of one’s destiny. Under this framework, if one’s income is insufficient and volatile, the reason is the person’s failure to obtain a better job. This failure is in turn attributed to one or several of the individual’s alleged traits or actions. These can include, among others: 1) a lack of fiscal and personal discipline that undermines one’s attempts to build fallback savings; 2) a “soft skills” gap or lack of hard work that keeps steadier jobs out of reach; and 3) ignorance that causes dependence on bad financial products such as payday loans. The fatal flaw of this theory is that it does not account for the cumulative disadvantage that generations of policy and practice have created for marginalized communities (Bhattacharya and Price, 2019). Evidence also shows that sufficiently large cash infusions help workers access better jobs, further undermining the theory that personal responsibility alone is the most important driver of opportunity (Bandiera et.al., 2020). 

Scarcity: The Bandwidth Tax and Tunneling

In the face of scarce and unstable resources, human cognition adapts in dramatic and sometimes counterintuitive ways. Sendhil Mullainathan and Eldar Shafir lay out a model for demystifying these adaptations in the 2013 book Scarcity. One concept foundational to the model, the bandwidth tax, deals with cognitive load. Humans have a finite processing capacity; when the mind is preoccupied with one task, performance in other areas is diminished (Mullainathan and Shafir, 2013). Matching income with expenses is cognitively expensive — re-budgeting continually to account for changing income, even more so. This demand on cognitive processing power leaves those with variable incomes at a disadvantage when it comes to mentally funding other important areas of their lives.

Tunneling, another concept in scarcity theory, posits that a narrowing of focus is involuntary and alters behavior. The resource perceived as scarce, as well as mental problem-solving to address the immediate consequences, demands attention regardless of whether the person intends to think about it or not (Mullainathan and Shafir, 2013). A psychological effect of this tunneling is the blocking out of consequences, considerations, and opportunities that fall outside the scope of the immediate problem. This crowds out alternative pathways and longer term thinking, as well as blunting capacity to address concerns that are “important but not urgent” (Mullainathan and Shafir, 2013). Thus, the nature of scarcity is that it encourages borrowing and discourages bandwidth and resource investment in behaviors that do not immediately address the issues within the scarcity tunnel (Mullainathan and Shafir, 2013). The unfortunate irony is that this often exacerbates scarcity in the long term. This insight into frequently-criticized behaviors, such as relying on financial products with high interest rates and fees and forgoing insurance, shows they are often the best of several bad options (Servon, 2014) and a natural and predictable consequence of scarcity rather than a result of poor financial literacy or unwise personal and cultural practices.

Basic Psychological Needs Theory

Basic Psychological Needs Theory, a subset of Self-Determination Theory, is useful for understanding why income volatility is so detrimental to the wellbeing of those who experience it. This behavioral framework points to three foundational psychological needs for human thriving: autonomy, competence, and relatedness (Chen et al., 2014). 

Autonomy conveys the human need for self-determination, or the ability to exert agency over one’s own behavior. As the holes in personal responsibility theory demonstrate, one’s circumstances are shaped by many outside forces. However, the extent to which external pressures intrude upon an individual’s autonomy varies based on whether they have the resources, material and otherwise, to mitigate these outside forces’ effects. For those who experience income volatility due to unstable working hours, the ability to earn an adequate income is dependent on the decisions of others, undermining autonomy. Dependence on one’s social network or other lenders to make ends meet could be another blow to autonomy. Financial hardship is also coercive in the sense that it dictates how one must spend their time and energy in order to secure subsistence. Feelings of competence can also be undermined by fluctuating income; the ability to provide for oneself and one’s family falls under the competence need, and it can feel less sure when income is unpredictable. 

Finally, humans need to feel deeply connected in their personal relationships. This need, relatedness, can be partially thwarted by the bandwidth tax imposed by scarcity; for instance, a parent can experience frustration when they are attempting to spend time with their family, but are pulled out of the moment by involuntary scarcity distractions or variable work demands.

Policy Alternatives

Fair Workweek Employment Standards

Philadelphia policymakers have passed retail, hospitality, and food service industry regulations to help address unpredictable income. The Fair Workweek Employment Standards chapter was added to Title 9 of the Philadelphia Code, "Regulation of Businesses, Trades and Professions," in 2018. This amendment requires covered employers to provide workers with a “good faith” projection of what their weekly hours will be (Fair Workweek Employment Standards, 2018). It further stipulates that employees receive more insight into their upcoming schedules on an ongoing basis, with scheduling details required ten days in advance (Fair Workweek Employment Standards, 2018). On the plus side, this policy is inexpensive and implementation does not rely on governmental actors. However, its effects are too narrow to make a real dent in income volatility; the policy design does not ensure that work schedules will not vary, only that workers will know about the variations slightly earlier. Thus, employees retain the burden of continually re-calculating budgets, a psychologically expensive activity that leaves less cognitive room for other tasks essential to thriving (Mullainathan and Shafir, 2013). The policy also allows exemptions for episodes of employer uncertainty, such as natural disasters. For example, due to COVID-19 the city has stated it will not be enforcing many aspects of the law until further notice (Gamburg and Jaitly, 2020). Hence the policy is suspended precisely when employees most need stability.

Earned Income Tax Credit

The Earned Income Tax Credit is a federal policy that returns tax revenue to workers who fall below a given earnings threshold. While refunds are currently given as a lump sum tax refund, proposals to spread the payments out seek to reduce month-to-month income volatility. The average refund is about $2,500 and roughly 180,000 Philadelphians meet the requirements (Philadelphia Department of Revenue, 2019).

The means testing for the EITC burdens those who are already under financial strain. Those with volatile incomes, a key segment of the targeted population, often cannot predict whether they will be eligible (Maag, Peters, Hannagan, Lou, and Siwicki, 2017). Even for those who are consistently eligible, applying for the EITC requires time, attention, and bandwidth that is already overloaded for those experiencing financial hardship and variable income. This process is onerous enough that the Philadelphia Department of Revenue must provide support services and resources to help people apply, including free tax preparation (Philadelphia Department of Revenue, 2019). It is telling that more than one in four eligible workers did not apply in 2019 (Philadelphia Department of Revenue, 2019). Plus, people who do not meet the work requirements are an intentionally excluded population.

Piloting a Guaranteed Income in Philadelphia

A guaranteed income pilot without means testing is the best way forward to address income volatility in Philadelphia. The policy logic of guaranteed income is consistent with the empirical evidence and theoretical frameworks, political buy-in is already in place, and non-governmental funding sources and partners are available. While a full rollout of guaranteed income would be too financially and politically challenging to achieve in the short-term, a pilot can begin quickly. Positive outcomes from such a pilot will soften the ground on funding options in the future while infusing much-needed cash into Philadelphia today. 

Pilot Design

Philadelphia’s guaranteed income pilot will adapt the Freedom Dividend concept to local conditions, taking the ongoing Stockton Economic Empowerment Demonstration (SEED) in Stockton, California as a source of guidance for implementation and design. Monthly cash payments of $500 will be sent to 250 participants for 18 months, distributing $2.25M directly to everyday Philadelphians. Key elements needed for a successful adaptation are modified eligibility requirements, a Philadelphia-specific disbursement plan, and robust research methods.

Eligibility and Targeted Population. Philadelphia residency, rather than US citizenship, will be the main eligibility criterion. The US Census provides helpful guardrails to define residency: one’s residence is the address where they sleep and live most of the time (US Census Bureau, 2020b). Edge cases, such as students and people who are unhoused, can also be addressed as indicated in the US Census protocols.

Philadelphia’s income pilot must refrain from exclusively targeting participants from low-income areas. As much as possible, pilot participants should form a representative sample of Philadelphians age 18 and older. This is a deviation from other pilot programs; for example, SEED included residents from neighborhoods below area median income (Martin-West, Castro Baker, Balakrishnan, Rao, You, and Tan 2018), and Pittsburgh Mayor Bill Peduto has indicated that a pilot there would target those with incomes that are less than 50% of the area median income (Herring, 2020). However, means testing severely hampers policymakers’ ability to understand how a less-targeted version of guaranteed income would affect other populations. As previously discussed in the policy logic analysis, means testing carries a high risk of the program exacerbating income volatility for some. This strongly suggests that a more universal version of the policy would be most effective, but more data is needed to understand the holistic impacts of this approach. Philadelphia needs to seize this opportunity to assess the effect of a more universal version of guaranteed income to avoid ending up with a full-scale policy that inadvertently harms those who are already financially unstable.

Locally-Appropriate Disbursement Mechanism and Benefits Counseling. SEED provides participants with prepaid debit cards, since many Stockton residents in the target population are unbanked (Martin-West, Castro Baker, Balakrishnan, Rao, You, and Tan 2018). The payments are provided on the 15th of each month to help compensate for end-of-month shortages when other benefits run out (Martin-West, Castro Baker, Balakrishnan, Rao, You, and Tan 2018). This mechanism and timing may work well in Philadelphia, but alternative methods such as bank transfers and app-based payments should also be evaluated for feasibility. Simpler distribution mechanisms would facilitate splitting monthly disbursements into two payments to further smooth volatility, with $250 being sent on the 7th and the 21st of each month.

Participation in the pilot must not cause harm through a reduction in overall benefits. Experts in the local benefits landscape should be available to counsel potential participants, and an emergency fund should be maintained to compensate for unexpected benefits losses.

Research Focus. Because the outcomes of the pilot will inform future full-scale policy, rigorous research techniques should be integral to the program administration, with a focus on measures of well-being and stability that are often burdened by income volatility. In particular, changes in participants’ ability to meet their needs as outlined by Basic Psychological Needs Theory (autonomy, competence, relatedness) and scarcity theory (cognitive load, tunneling) should be carefully assessed. Differential impacts of the payments on Philadelphians from different income brackets should also be a central focus of data collection. The University of Pennsylvania Center for Guaranteed Income is a strong candidate for research partnership.

Legislative Path

Many political pieces are already in place to pursue the recommended pilot. In March 2020, the Philadelphia City Council Special Committee on Poverty Reduction and Prevention released the Philadelphia Poverty Action Plan (Special Committee on Poverty Reduction and Prevention, 2020). One of the committee’s recommendations was to establish a public-private partnership which, among other initiatives, would furnish some residents with a Philadelphia Basic Income (Special Committee on Poverty Reduction and Prevention, 2020). The first legislative step in implementing these recommendations was completed in November 2020, when City Council passed bills to establish the non-profit Philadelphia Poverty Action Plan Fund with an initial grant of $10M (Philadelphia City Council, 2020). Board members will be appointed by city officials and the United Way of Greater Philadelphia and Southern New Jersey, which has been an important advocate for cash transfer policies in Philadelphia (Hetrick, 2020).

Mayor Jim Kenney signed the bills into law December 1 (Philadelphia City Council, 2020b). Mayor Kenney had previously signed on to the advocacy network Mayors for a Guaranteed Income, indicating his commitment to the idea (Meet the Mayors, 2020). In news coverage of the network’s launch in September 2020, Mayor Kenney was quoted as saying, “Sure, some people yell ‘socialism’ when they hear the concept of guaranteed income. I think back to my grandparents getting their social security check and my parents getting their social security check and now I'm looking forward to getting my social security check. I do know that those things have become part of the fabric of America and we can make this part of the fabric of America where it's not looked down upon.” (Taliaferro, 2020) 

While this paves the way for the embrace of a pilot, the current framing of guaranteed income as a tool to reduce the poverty rate rather than an income volatility solution would suggest a means-tested sample population. Mayor Kenny spoke about guaranteed income as a policy in the same vein as the universal-leaning social security, but the authors of the Philadelphia Poverty Action Plan appear to be thinking along different lines. The Plan describes the Philadelphia Basic Income proposal as “cash transfers to provide stability and economic independence for households experiencing poverty, including those aging out of foster care, returning from incarceration, experiencing addiction and medical fragility, and fleeing domestic violence.” (Special Committee on Poverty Reduction and Prevention, 2020) In news coverage of the plan, bill co-sponsor Councilmember María Quiñones-Sánchez reiterated her preference to funnel guaranteed income to narrow slices of the Philadelphia population (Blumgart, 2020).

Strategic funding and partnerships can reconcile this framing with the recommendation to include non-means-tested pilot participants. If means testing is omitted completely, opposition could distract from the pilot’s aims by creating a narrative that the government’s so-called anti-poverty allocation is not going to the people who need it most. This argument could be particularly persuasive at a time when the COVID crisis has pushed even more people into destitution (Center on Budget and Policy Priorities, 2020). On the other hand, means testing in a full-scale policy could backfire tremendously, and data on the effect of a non-means-tested version of guaranteed income is essential to understand how it would affect Philadelphia’s economy in the longer term. To achieve the correct balance between immediate relief and effective long-term policy, the Philadelphia Poverty Action Fund board should earmark only non-government contributions to the Fund for non-means-tested pilot participants. The Economic Security Project, which helped fund SEED (Emison, 2020) and recently received a $15M grant for guaranteed income initiatives (Kim, 2020), could prove a valuable partner in funding these non-means-tested participants. The Fund leadership could also choose to phase non-means-tested participants in at a later stage of the pilot with this alternate funding source to clarify the delineation.