Sunday, January 16, 2011

Risk and Reward in the Job Market

In the capitalist view of economics, the reason for business profits is to reward risk-taking. Workers don’t participate in the risks of the business, so they aren’t included in the idea of profit.

But wait a minute. This model is based on several assumptions that don’t fit as well as they used to, including the assumption that, if the business cuts back or fails, the workers can go work somewhere else. In the current job market in the United States and Europe, where there is long-term high unemployment and low hiring, a fired worker can’t just pick up the pieces and go work at another employer the next week. A few do, to be sure, but many of the workers who lose their jobs this year will remain jobless for years.

It is still imagined that this doesn’t represent a risk for workers because, it is imagined, workers don’t have an investment at stake in their work. But workers do have an investment in their work, larger in many cases than the investment their employers have made.

Consider, specifically, the workers who have spent four years and $250,000 on a college education. About half of U.S. jobs require a bachelor’s degree, so getting a bachelor’s degree is a sensible investment, but it can be a frighteningly large investment. How much does the employer have invested? To make the comparison, you have to divide the business’s capital at risk by the number of employees. Often, this will be less than $100,000 per employee. This means that when employers and employees meet in the job market, it is not unusual at all for the employee to be carrying far more risk than the employer.

You can measure this effect just in terms of time. How many businesses spend four years recording losses before they start to make a profit? Some do, and some don’t — but virtually every college student records four years of losses before there is any chance of making a profit on the college education.

I have been using a 4-year college education as an example, but the question of investment and risk is not just about education. This year, many workers will spend 1,000 hours just searching, applying, and interviewing for a job. Some will get a job at the end of this process, while others will get to try again next year. This too is a considerable investment of time for workers, and it is not merely unpaid, but comes at a financial cost that is not only noticeable but painful for someone with a minimal source of income, or none at all.

This would not be a great concern if the current high unemployment levels were expected to return to more comfortable levels within a year or two, but that is not likely. No one (within the scope of currently acceptable political policy thinking) even has a plan that would return unemployment to a more manageable level of 4 percent — and even if that were on the way, 4 percent unemployment still represents a substantial degree of risk and pain for workers. Instead, most forecasters expect U.S. unemployment to remain above 6 percent for the next 7 years or longer — and some European countries may do worse in this regard.

The total investment that workers typically make in their careers is already more than 30 percent of the time they actually spend working, and this ratio is creeping higher. Workers, not business owners, are actually the big risk-takers in the current economy. The risk and reward are in the wrong places. It simply should not be so risky to be a worker — nor should business owners be so highly rewarded for taking risks that are smaller than the risks their employees are taking.

In traditional economic theory, this should lead to a series of adjustments. More people should become business owners. Fewer people should interested in becoming employees, at least in the areas that require a large upfront investment. This year, this will mean negligible growth in payrolls and more freelancers. Within ten years, employers will have to change the employment contract to make it more attractive for skilled workers.

Changes are also needed in the way we finance workers. There is no excuse for a system in which a new degree-holder is also holding half a million dollars in debt. Education doesn’t have to cost so much. Indeed, it is so beneficial for society that one could argue that parts of it, such as textbooks, ought to be free. Similarly, there ought to be ways to take away some of the cost and effort of job-searching, so that those costs do not fall mostly on unemployed and underemployed workers. These kinds of adjustments are called for out of a sense of fairness, and are needed to minimize the financial distress and the number of worker and business bankruptcies that will be occurring as the job market makes the adjustments that are on the way.