Neighborhood Trust thanks the researchers and thought-leaders highlighting the important connection between work and debt who are cited throughout this paper, particularly the U.S. Financial Diaries, United for ALICE, the Debt Collective, and the Aspen Institute. We are grateful to Aliah Greene, a board member of Neighborhood Trust, for offering her support and expertise throughout the development of this piece.
Today’s workforce is overwhelmed with debt, inhibiting their near-term well-being as well as their long-term economic mobility. While the COVID-19 pandemic did not create the current debt crisis, the last year and a half has exacerbated and illuminated the extent to which workers in low-wage, low-quality jobs are financially insecure and reliant on debt to survive. Workers are facing persistent cash flow shortfalls and unmitigated financial shocks, due to insufficient action from stakeholders in the labor market. Both employers and policymakers have enabled the cost of living to continue rising without sufficiently adjusting workplace practices or regulations around scheduling, minimum wage, benefits packages, paid leave, unemployment insurance, or health insurance.
U.S. households currently carry a cumulative $14.64 trillion in debt and 29% of them have debt in default or collections. This burden is even greater for workers of color, 39% of whom carry debt in collections, relative to only 24% of white workers. In May 2021, the Consumer Financial Protection Bureau found that 50% of consumers who reported that they struggle to pay their bills, also reported borrowing money either using formal or informal credit. Of those who borrowed, 21% turned to alternative financial services, reflected by the 12 million Americans who take out payday loans each year. If they are unable to repay their debts, workers potentially face a collections account on their credit report, wage garnishment, bankruptcy (which is twice as likely among payday loan borrowers), or going without the essentials. And the impact of these debts matter. Overwhelming debt inhibits opportunities for economic growth, educational attainment, psychological well-being, and even physical safety by preventing access to secure housing.
The pervasiveness of the low-quality jobs driving this debt crisis is largely a result of the Great Risk Shift, a term coined by economist Jacob Hacker to refer to the series of changing policies and practices throughout the 20th century, which shifted the financial risks of retirement, illness, job stability and loss of income from government and employers to individuals. This environment of individual-responsibility is not neutral; it is disproportionately more challenging to navigate for low-income workers of color. And in the decades since the start of the Great Risk Shift, we have seen the nature of work continue to become less forgiving, as our economy increasingly relies on stifled worker power via industry concentration and weakened unions.
With weak and fraying mechanisms to exert worker voice, today’s workers are trapped in poor quality jobs with low wages, making expensive debt an essential part of getting by. A perfect storm of rising costs of living, stagnated wages, reduced worker power, increased gig/contract work, and insufficient benefits has been brewing for decades, gradually forcing more and more workers, particularly workers of color, to lean on credit to stay afloat. For example, a study published in the National Bureau of Economic Research found that lower employer competition has correlated with lower wages since 1977, with the relationship merely growing stronger over the years. 44% of all U.S. workers are low- wage, earning a median hourly wage of $10.22, with Black and Latinx workers most likely to earn low-wages. The lowest-earners are also the least upwardly mobile, with “workers in the lowest wage quintile having the highest likelihood to switch into another low paying job, and workers in the second lowest quintile having a 55% chance to remain or move into the lowest quintile.”
Also consider the results of the U.S. Financial Diaries project, a groundbreaking effort to gather both quantitative and qualitative data that illustrates the complexity of the challenges facing low-income families. The data revealed that low-income families’ financial insecurity and scarcity is as much driven by low-wages as it is by volatility and unpredictability. Only 36% of the U.S. Financial Diaries’ sample of low- to moderate-income households exclusively received employment income from a job with recurring wages, with the remaining 64% piecing together income through part-time jobs, gig work, and/or government benefits. And even recurring income can vary substantially from paycheck to paycheck, often due to irregular hours. “To compensate for irregularity in income over time,” and navigate unpredictable spikes and dips in paychecks, households either sacrifice certain bill payments or turn to credit cards and small-dollar credit products to close the gap—and hope they’ll eventually have an income spike to catch back up.
United for ALICE reports that in 27 states, at least 40% of households live above the federal poverty line yet “cannot afford the essentials in their communities.” Therefore, the “debt crisis” among low-income workers is not simply a result of compounding high interest rates and misinformation about how to pay off debt efficiently; nor frivolous overspending. In a national survey conducted by the think tank Demos, 40% of households with debt, and 45% of households earning less than $50,000 per year, reported using credit cards within the last year to “pay for basic living expenses such as rent or mortgage payments, groceries, utilities, or insurance.”
Even “good debts” like mortgages and student loans, which can plausibly serve as a path towards wealth building, are persistently inaccessible or harmful to low-wage, particularly Black and Latinx, workers. Student debt in particular is devastating the financial health of communities of color across the country, with the median Black borrower still owing 95% of their original student debt balance 20 years after starting college, while in the same 20 years the median white borrower has paid down almost 95% of their original balance. Aspen Institute’s EPIC initiative labeled the burden created by student loans as “a critical dimension of household financial security, [creating] liability for low-income students and students of color.”