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- Dealing with sudden, unpredicted financial costs such as health expenses or unemployment poses a particular challenge for people living in the poorest households, whose income often barely allows them to get by.
- In Bangladesh, many garment factory workers struggle to make their incomes stretch until the next payday, forcing them to seek credit, often from informal sources.
This brief uses a study of 632 garment workers to evaluate whether changes in the timing of wage payments can help workers smooth their consumption and avoid budget shortfalls at month’s end.
- The authors find that workers who receive a pre-payday bonus had significantly greater total savings and were less likely to report borrowing money from an informal lender.
- However, it was also found that those paid in cash increased food consumption, but those paid through electronic payroll accounts didn’t, suggesting that workers paid in cash were previously more likely to be short on money. Therefore, the cash bonus had a disproportionally large effect on increasing their consumption.
- Overall, the findings suggest electronic wage payments can automatically act as a consumption smoothing tool and have larger welfare benefits for workers.