This chapter lays out the social policy theory of everyday borrowing. It discusses the extent to which welfare states protect against social risks and provide social investments. In many countries such services have become insufficient in light of fragmented employment patterns and life course trajectories, resulting in increased demand for private coping mechanisms to address financial gaps due to volatile incomes, earnings losses, and rising expenditures. It introduces the concept of credit regimes, arguing that the institutional structures and regulatory and policy environments shape credit regimes’ permissiveness and households’ access to credit. The chapter explains how the constellation of welfare state and credit regime structures shapes the role of credit as a coping mechanism. When credit regimes are permissive, households borrow to address social risks and use credit as social investments. Credit either substitutes for or complements welfare states depending on which groups social policies protect and support. By contrast, when credit regimes are restrictive, households draw on savings, utilize family support, or cut expenditures because the borrowing option is precluded. The reliance on credit markets instead of social policies reflects a much more fundamental transformation of social rights, social responsibilities, and the allocation of resources and risks.

This chapter documents how structural changes in labor markets, life course trajectories, and welfare states have increased income volatility and financial shortfalls over time and across countries. It begins by offering a new measure of financial shortfalls, comparing households’ annual gross and net income volatility based on panel data from Denmark, the United States, and Germany, revealing considerable variation in income volatility across and within countries. It shows that the Danish welfare state absorbs much larger amounts of gross income volatility that the flexible labor market produces compared with the United States. In Germany, the welfare state also addresses a sizable share of gross income volatility. But unlike in Denmark, gross income volatility has declined slightly since the mid-2000s, while net income volatility increased during the Hartz reform period of the early 2000s. This chapter further shows that in Denmark and the United States income volatility due to life course events such as taking time off work to raise families or to get training and education is much more prevalent than income volatility due to unemployment or sickness. In Germany, by contrast, employment disruptions still drive more income volatility than life course choices.