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BusinessWeek: January 10, 2000 |
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Economic Trends
Plastic Puts the Poor at Risk Pocketbooks suffer as debts grow
The study's focus is on the dramatic increase in credit-card usage by the poor. In 1989, it reports, only 17% of poor families had credit cards. Yet six years later, in 1995, 36% had at least one card, as did 57% of near-poor households (incomes from 100% to 150% of the poverty level). Meanwhile, the average monthly balance of the poor with cards soared from $343 to $1,380, as the average charge paid by those carrying balances (two-thirds of the group) jumped to $236 a month--and $317 for near-poor families. That's not all. In the expansion of the 1980s, as more-affluent families boosted their credit-card balances, poor families actually reduced theirs. In the 1990-91 recession, however, as nonpoor families temporarily moderated their use of credit-card debt, poor families greatly increased their debt loads. More important, they have continued to do so in the subsequent recovery. This pattern raises some interesting questions. On the supply side, why have banks welcomed such presumably high-risk borrowers as poor households? Has the continuing economic boom led lenders to conclude that the poor are more credit-worthy than in the past? Or, has the sharp decline in banks' cost of funds, combined with their continued ability to charge 15% to 22% interest on card balances, made high-risk lending more profitable? On the demand side, initial research has found that many former welfare recipients have trouble maintaining previous income levels, and it may be that greater use of credit-card debt has played a part in the relatively smooth introduction of welfare reform. In the short run, in other words, credit cards may be functioning as a safety net, easing the transition to the world of work. Eventually, however, servicing such debt becomes a growing burden, lessening the cash available for consumption. And when a recession finally occurs, the government may find itself confronted not only with a rising number of poor families whose incomes have declined sharply, but with many who are saddled with large amounts of debt. Return to top   Return to top The New World of Work Flexibility is the watchword How is the nature of work changing as the 21st century begins? A 1999 survey of workers in California, where the New Economy first took root, highlights current trends. The survey's authors, Edward Yelin and Laura Trupin of the Institute of Health Policy Studies at the University of California, San Francisco, report that 39% of the state's workers got a promotion or moved on to a better job in the past year, 59% had a rise in earnings, and 40% have been in their current jobs less than three years. Some 12% hold more than one job, and nearly a third work more than 45 hours a week. One in five workers was laid off from a job in the past three years. In short, job mobility and flexibility seems to be the order of the day. Indeed, the survey indicates that only a third of California workers have "traditional jobs"--that is, single, permanent full-time day-shift work paid for by an employer at the employer's site. And only 22% have held such a job for at least three years. The most intriguing finding concerns the relationship between work--or lack thereof--and health. Regardless of workers' race, gender, or educational background, the researchers found that those who lost a job between 1997 and 1998 were twice as likely to experience a subsequent decline in health or the onset of disability as those with continuous employment. By contrast, working more than 50 hours a week, holding two or more jobs, or doing heavy physical labor had no apparent negative effect on workers' health--at least over a one-year period. Return to top | |
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Why That Deal Is Only $9.99 A "sale" reflex turns shoppers on In the ideal world of economic paradigms, shoppers are acutely price-sensitive--adjusting their demand for a product to shifts in its relative price. But in the real world, consumers are often uncertain about whether prices represent bargains and thus depend on cues to guide their behavior. Consider the use of price tags ending in $9 or 99 cents. Because merchants often use such prices for products that are on sale, consumers tend to believe they denote good value. What many merchants may not appreciate, however, report Eric Anderson of the University of Chicago and Duncan Simester of Massachusetts Institute of Technology, is how effective they can be. In a recent demonstration, the two business school professors got a national merchandiser of women's clothing to distribute three different versions of its catalog on a random basis to customers--listing prices of $44, $49, and $54 for the exact same item. But while the $44 and $54 prices sparked almost identical demand, sales at the $49 price were more than 50% higher. So why not put prices ending in 9 on a lot more items? The researchers tried that tactic in other catalogs and found, as they expected, that as more products were priced that way, the more muted were the responses to any single product. "When the strategy is used too often, it becomes less informative and consumers react accordingly," says Anderson. Return to top  Return to top |
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