States Matter: An Exploration of Economic and Safety Net Policies That Reduce Financial Strain

Background

About one-fifth of U.S. families are experiencing financial strain emerging from the COVID-19 pandemic (Federal Reserve Board, 2022). Financial strain is the degree to which people do not have enough money to meet their expenses and are concerned about not having enough money (Gutman & Eccoles, 1999). Financial strain can have both objective and subject aspects and is an indicator of financial wellbeing (Asebedo & Wilmarth, 2017).

Abundant research demonstrates how individual characteristics (e.g., age, race/ethnicity) shape financial wellbeing and strain. This study builds on this prior work, but instead emphasizes structural context by examining how US state policies shape population financial strain.

The devolution of social welfare policy from the federal to state governments enables states to make increasingly independent policy decisions that impact family finances (Donnelly & Farina, 2021; Laird et al, 2018). At least two policy clusters are particularly prominent. First, economic and labor market policies (e.g., minimum wage and state-level Earned Income Tax Credits) raise lower-income worker income floors. Second, safety net policies (e.g., Supplemental Nutrition Assistance Program benefit levels and Medicaid expansion) are likely to indirectly offset the financial concerns of low-income families. The purpose of this study is to examine the extent to which changes in state’s economic and safety net policies affect population level financial strain.

Method

We studied state level financial strain by creating a three-item index from National Financial Capability Study conducted in 2012, 2015, 2018, and 2021. Items included difficulty paying bills, perceived over-indebtedness, and financial fragility. Individual index scores were aggregated and weighted to the state level. We explicitly tested lagged relationships between (1) economic and labor policies and (2) safety net policies derived from existing state-level databases. State demographic controls were compiled from analysis of the Current Population Survey. In this longitudinal panel design, state-years were the unit of analysis (n=200). We analyzed changes in state’s financial strain as fixed effects where each year was nested within a state to control for unobserved characteristics that may otherwise affect the dependent variable (Allison, 2009).

Results

State-level financial strain declined over time (2.67 in 2012 to 2.37 in 2021) and varied considerably across states (Mississippi 2.71 to Hawaii 2.33). Controlling for state demographic (age, race/ethnicity, marital status, and education) and economic patterns (unemployment rate, gross state product, and poverty rate), fixed effects regressions revealed that both economic and safety net policies matter for financial strain. First, changes in state’s minimum wage were associated with decreased financial strain. (β = -.024, p< .01). Second, when states expanded Medicaid there was a meaningful decrease in financial strain (β = -.048, p<.05).

Discussion

This study advances knowledge about context shaping financial strain by studying state-level policies. As hypothesized, both economic (minimum wage) and safety net policies (Medicaid) play a role in reducing financial strain. Other policies expected to influence financial strain were not supported (e.g., state EITC and levels of unemployment benefits). These non-findings may be explained by the study period (2010s) within which the economy grew considerably.