Payday Loans and Pay Periods: What’s the Relationship?
Inside Subprime: Nov 19, 2018
By Holly Kane
Millions of Americans live paycheck-to-paycheck, working a full-time jog while juggling expenses and counting the days until payday. While waiting two weeks between paychecks is typical for most workers, the system is outdated and harmful, according to a USA Today op-ed.
Biweekly pay schedules arose out of wartime taxation policies of the 1940s that led to federal tax withholding, said professor and labor historian Nelson Lichtenstein in an NPR interview. Up until World War II, only the highest earners paid income tax, according to TIME’s tax day history. When wartime costs led to payroll withholding to increase revenue, paychecks and their administrative baggage replaced the comparatively informal system of paying workers in cash.
Now, 37 percent of businesses pay their employees every two weeks, while 32 percent pay every week, according to a 2014 article by the Bureau of Labor Statistics. Where businesses with up to nine employees used weekly and biweekly schedules at the same rate, businesses with 1,000 employees or more used biweekly schedules nearly three times as much as weekly schedules.
The enduring, ubiquitous practice has stuck around so long mostly because businesses are constrained by administrative paperwork and their own outdated policies, according to CNN. Basically, everyone is doing it.
The lack of a daily paycheck gives exploitative payday loan companies an easy in, Lichtenstein said, and they take advantage of the work-to-wage time gap and the need for timely compensation. The entire problem could be solved, he said, with higher wages.
“This would not … be quite so pressing an issue if we had higher wages,” Lichtenstein said. “[H]igher wages are a good thing, and they tend to take the pressure off.”
Higher wages aside, when employees are paid as their work is completed, those who have been “locked out of basic banking services for far too long,” said Chen, can actually have a shot. While banks seem like a necessary part of life, for some Americans, those services are fundamentally out of reach.
The Federal Deposit Insurance Corporation (FDIC) found that, in 2017, nearly 20 percent of U.S. households were underbanked, meaning the household had a bank account but participated in services outside of the traditional banking system, like payday loans.
Lisa Servon, author of “The Unbanking of America: How the New Middle Class Survives,” said in an NPR interview that regular users of non-traditional bank services found the associated fees and costs of payday loans and check cashing services predictable and somewhat small compared to overdraft fees or other bank-associated costs.
“Some people have been pushed out of the banking system entirely,” Servon said. “[T]hey simply can’t afford it.”
The system especially impacts those who get paid hourly but don’t have benefits, like restaurant workers or home health aides. Paying a bill late is more of a concern than forking over a check-cashing fee.
Thanks to technology, however, the biweekly pay schedule can be reworked. Many startups have produced apps that allow employees to access part of their wages at the end of every workday, with no fee for workers and a dollar a month for employers. These apps are geared toward hourly workers who are more likely to enter into costly payday loan arrangements to bridge the gap between payday and payment-due-by dates.