Context

Wagestream is a financial wellbeing app provided in the workplace for employees in frontline roles, such as in hospitality, retail, logistic and healthcare, who are typically lower earners working variable hours. The app offers some of its members the option of being paid more frequently, and emerging analysis has shown that the significant majority of Wagestream app members who opted for more frequent paydays spent less than they did before.

‘Scarcity mindset’ is a concept in psychology and behavioural economics which describes how people experiencing scarcity are affected not just by scarcity but the distraction of it, which substantially impacts their available IQ, impulse control, and decision-making, ultimately exacerbating poorer outcomes.

Most people understand intuitively that how we feel about money impacts how we feel more generally, with financial stress potentially affecting our sleep, our focus at work and our relationships. The scarcity mindset can be applied to financial scarcity and financial stress, and has been shown in previous research to impact the IQ of people in lower income households by up to 13 IQ points.

The study

This study was based on findings from a survey over 4,570 low-to-middle income workers (typically on hourly pay, earning less than the national median annual wage of £34,953) from across the UK who used the Wagestream app in quarter 1 of 2023.

The short survey asked people about their budgeting and spending behaviour and related this to gender, age, household role, and financial health score. Closed-response questions were designed in consultation with an expert, using Likert scales with negative and positive outcomes, and substantial free-text responses were allowed to provide depth of understanding.

The study explored three main research questions:

• How is scarcity affected by demographics and why are women more affected?
• Can a financial support toolkit help to alleviate a scarcity mindset?
• What explanations might there be for the observed behaviour changes?

The report was prepared by Wagestream, with advisory input from Money and Pensions Service and University of California, Berkeley, and incorporates relevant evidence from the literature.

Key findings

The demographics of scarcity, and why women are more affected

• Wagestream members are typically paid by the hour (71%), in part-time work (61%), take home £1,400 per month, earn less than the national median wage (80%), and are women (no figure given).
• In the study sample, women were more likely than men to report that they:
  • were supporting children (38% vs 17%)
  • were a single parent (14% vs 2%)
  • were a breadwinner in their household (74% vs 66%)
  • were putting savings aside directly from their pay (32% vs 23%)
  • had £0 in available savings (36% vs 31%)
  • experienced frequent money worries (56% vs 49%).
• They were also less likely to be confident about meeting their long term financial goals (13% vs 22%).

Whether a financial support toolkit can help to alleviate a scarcity mindset

• 32% of respondents report no change to their budgeting or spending.
• 78% of Wagestream members who used the flexible pay feature app said they had spent less since using it.
  • 82% of these attributed this to the feature.
  • Free-text responses identified better visibility, better control, improved decision making as some of the reasons for this.
• Reasons why some members said they now spent more included having the confidence to know that bills would be covered, leaving room to spend more on non-essentials.

Possible explanations for behaviour changes

• Previous research as shown that increasing the frequency of paydays reduces cognitive load, and thereby improves outcomes such as borrowing levels, ability to afford education and training and childcare, and financial stress.
• As such, the predictability of more frequent pay, and/or its consumption smoothing effect are hypothesised to enable the reductions in spending, via the effect of the reduced cognitive load of managing scarcity.

Points to consider

Methodological strengths or limitations

• The report is an exploration of the concept of scarcity mindset and considers how this concept might explain why a sample of low-income workers reported reduced spending during a period of increased costs. This was not conducted as an academic study into scarcity mindset.
• The survey sample was based on 4,500 Wagestream members who tend to earn below the median wage, and the authors note that the findings should not be taken to be representative of the general population.
• The authors note that the findings were based on self-report and do not provide a longitudinal picture.
• The approach to analysis of free-text responses is not given.
• Many of the key findings are based on subsamples. Sample numbers can be calculated throughout the report and are of a significant size.
• The report makes the assumption that the effects of greater pay visibility and greater payday frequency on (reductions in) spending is evidence of increased cognitive ‘bandwidth’ and therefore reduced scarcity mindset.

Applicability

• The findings should be of interest to policymakers and practitioners who seek to support people in poor financial health, to improve their own understanding of people’s behaviours in this context and its impacts on people’s capacity to absorb the support organisations might offer, make decisions and manage their emotions and wider wellbeing.

Relevance

• The study is highly relevant given the recent high levels of financial stress in the population, and the particular income challenges faced by low-to-middle earners with irregular hours and pay.

Generalisability/transferability

• Despite the limitations of the research, the study offers insights that might be tentatively related to the broader population of low-to-middle-income earners in the UK as a whole, and in other countries with similar financial and job markets.