Poor and wealthy hand-to-mouth households in Belgium
Working Paper N° 432
So-called “hand-to-mouth” households are characterised by a very high marginal propensity to consume or, in other words, a consumption pattern that is more sensitive to temporary shocks and transfers affecting income. Most low-income households have meagre savings and so are obliged to pass on income fluctuations to consumption. These households are the “poor hand-to-mouth”. However, a second category of such households exists, namely the “wealthy hand-to-mouth”. These are households with substantial illiquid assets, in the form of housing or retirement accounts, but little or no liquid wealth to face a temporary, unexpected drop in income. For this type of household, securing a high return on illiquid assets rather than holding large balances of liquid assets with a low return can be optimal in the long run. Wealthy hand-to-mouth households have typically been missing from theoretical and empirical studies. Nonetheless, due to the illiquid nature of their wealth, their consumption patterns react more strongly to temporary government transfers or income fluctuations.
According to recent survey data (Household Finance and Consumption Survey), one fourth of Belgian households can be considered hand-to-mouth. A majority of these are wealthy hand-to-mouth households which resemble non-hand-to-mouth households in many respects, such as demographics, portfolio composition, liabilities and monthly payments. Consumption responses to a temporary income shock vary across hand-to-mouth status and, in that regard, wealthy and poor hand-to-mouth households are relatively similar. However, when evaluating these differences, it is crucial to account for other characteristics of the households under consideration. In particular, the age of the head of household plays an important role. These findings have far-reaching implications for the design of fiscal policies in a recession, and economic stimulus should take into account not only the income level of households but also their hand-to-mouth status.