Giving workers the option to defer receiving some of their wages increases overall savings and helps workers better plan for lump-sum purchases, such as home improvements, according to new research that upends the common economic assumption that workers always prefer to be paid early.
The paper, forthcoming in the American Economic Review, was based on an optional savings program implemented at a large tea farm in the southeastern African country of Malawi.
Of 870 full-time workers who were given the option of enrolling in a program that would let them defer a fraction of their income for three months at zero interest, nearly half chose to join. Participants saved 14% of their wages, on average, and 92% made more than one deposit into their deferred-payment account, researchers from Northwestern University, Dartmouth College and the University of Minnesota found.
The savings pattern helped workers save up for larger purchases, according to the researchers. Two years after the initial round of the deferred-payments program, workers who had chosen to participate in the program were 7.7% more likely to have metal roofs on their homes; four months after the plan ended, participants saw the value of their durable assets — a consumer goods category that includes appliances and furnishings — increase by 10%.
The results suggest that giving workers the option to defer wages can encourage savings and help fund lump-sum purchases, especially in regions where credit is not readily available.
"Having this choice seems like the superior way to go," said co-author Lasse Brune, a postdoctoral fellow at Northwestern University's Global Poverty Research Lab.
In Malawi, workers are often skeptical of using formal banks to store their money, due to wariness of excessive fees and difficulty accessing branches, Brune and his co-author, Jason Kerwin of the University of Minnesota, told The Academic Times. Additionally, they said, workers who stored money in their homes could lose the money or be victims of theft.
In one case, a worker who stored money in the rafters of his home had the roof of his house ripped off in a storm, leaving him both without a roof and without the savings to pay for repairs, according to Kerwin.
"The alternative savings options, even if they're there, can be pretty bad," he said.
But deferring payments may also be a useful option for workers in developed economies like the U.S., according to Kerwin and Brune.
"If you're uncomfortable borrowing to make a major purchase, then something like this to help you accumulate that money could be a major help," Kerwin said.
In fact, some deferred payment-type dynamics are already at play in the U.S. and Europe.
Kerwin pointed to evidence that some Americans intentionally overpay their taxes in order to receive a larger lump-sum tax return from the Internal Revenue Service. Brune, who is originally from Germany, pointed to the European convention of the "thirteen month salary," in which workers receive one-thirteenth of their salaries as a lump sum at the end of the year.
A deferred-payment option could also be especially useful for Americans with bad credit scores, who cannot access loans with reasonable interest rates, the researchers said.
"If you think of credit cards as being this trap, especially for low-income people, this could help," Kerwin said.
Deferred payments could also facilitate distribution of U.S. government transfers, such as social security payments, the researchers said.
"The U.S. government gives out lots of money in various ways," Kerwin said. "It would be very straightforward to offer people the option of taking deferred lump sums."
Brune and Kerwin met in the economics graduate program at the University of Michigan. Along with their third co-author, Eric Chyn of Dartmouth University, they have conducted a series of experiments in Malawi. In a 2018 paper, the trio examined workplace peer effects at Lujeri Tea Estates, the same place they conducted the deferred-payments study.
"For fieldwork like this, that happens at this micro level. … You need a lot of context knowledge," Brune said. "Both Jason and I had worked a lot in Malawi."
The researchers came up with the idea for the paper while in Malawi working with locals, doing fieldwork for an earlier paper.
"We had been doing other research in Malawi and noticed this pattern where our field staff — we would have to hire them and pay them — would occasionally ask us not to pay them yet," Kerwin said.
The paper, "Pay Me Later: Savings Constraints and the Demand for Deferred Payments," forthcoming in the American Economic Review, was authored by Lasse Brune, Northwestern University; Eric Chyn, Dartmouth College; and Jason Kerwin, University of Minnesota.