In the day job, I point out that it is impossible for young people to save optimally for their retirement. This isn't just because of the well-known problems of weakness of will or low incomes, but also because of unavoidable uncertainties about how future tastes and working conditions will change.
This, though, is not the only big but impossible decision we expect young people to make. It is also impossible for them to make the right career choices. This isn't just because their characters and preferences are not yet fixed and so they cannot know what jobs they are best suited for. It's also because of uncertainties about technical progress. Will robots take our jobs (pdf)? Or will they instead hurt capitalists more than labour? Or will they accelerate job polarization? Or create more opportunities for service jobs? Or are we just exaggerating their impact?
We just cannot know. We are therefore asking youngsters to make the biggest investment decision of their lives under conditions of immense uncertainty. And, worse still, we are asking many of them to do so when they lack the experience and maturity to take big decisions.
You might reply that this has always been the case. To some extent, yes. But I suspect the problem is greater now. Back in the mid-80s - when my generation was making its career choices - we did not worry that technical change might utterly transform the labour market, possibly for the worse, as intelligent judges worry today.
In this sense, one aspect of intergenerational injustice is overlooked: youngsters face more uncertainty than we oldies did in our day.
Surprisingly, though, this problem doesn't get much attention. But it should. There's cross-party agreement that inadequate education causes a waste of human potential. Nobody, however, seems worried that uncertainty about the future of the labour market will also cause a waste of potential because people will choose careers that turn out to dead ends. As Alan Bennett said, the British are good at hypocrisy.
The question is: what to do about this?
I've advised young people to make as much money as they can as soon as they can: short-termism can be a rational response to uncertainty.
Another thing to do is to have a high state pension: the government's "triple lock" on pensions will benefit youngsters more than oldsters simply because 40 years of a rising pension is better than ten years. A decent pension, in effect, reduces uncertainty about the future by ensuring a decent income at the end of our lives.
There is, though, a third possibility - macro markets. Robert Shiller has proposed markets in livilihood insurance. We can, in principle, he said, construct indices of occupational earnings. Such indices could then be traded which would allow occupational risk to be traded:
An individual could buy an insurance policy against an erosion of income of people in his or her occupation, against erosion of income of people with his or her characteristics (in terms of job history or education), or against erosion of incomes of currently high-income, middle-income or low-income people as a group. (The New Financial Order, p 113-4)
The benefits of such markets might not stop there. If you believe prediction markets are efficientish, they will help people to make career choices: a high price for some occupational indices would be a sign of good careers, and a low price of bad careers. These would be better signals than current wages, which only tell us about present market conditions, not those in 10 or 20 years' time.
Herein lies the question. Why don't such markets exist? One answer might be that people haven't worried about occupational risk. If this is the case, then we should see them emerge as these risks become more salient.
Another possibility is that markets are themselves a form of public good; because the gains to having such markets accrue to many people, they cannot be appropriated by single individuals and so markets will be under-supplied.
There is, though, a third possibility. It could be that the very idea of a market economy has become bastardized to mean simply a set of institutions which further enrich the wealthy - so much so that the possibility that markets could benefit everyone has simply been forgotten.
Prof. Shiller is under no illusions about the multitude of obstacles to implementing his ideas (overcoming psychological barriers, getting the needed information etc.) as he lays out in the same book. A few paragraphs at the end of a blog post can't really handle all these.
To me, the book presents a bit of a paradox. His ideas are radical and progressive - expanding financial assets and economic security to the masses. As he puts it, though:
"Democratizing finance means drastically expanding the financial sector so that it plays a deep role in our lives."
Most radicals and progressives now see finance as an enemy and wishes to shrink the financial sector. Hence the paradox.
Posted by: Steven Clarke | March 03, 2015 at 04:01 PM
Who was it said that "whenever I hear somebody proposing a new form of abstract insurance, I reach for my gun"?
Posted by: gastro george | March 03, 2015 at 04:11 PM
It's not entirely accurate to say that such markets don't exist. In a limited way, both PPI and IPI provide cover for future employment uncertainty. The reason why a more extensive, career-oriented market doesn't exist is because there is no willing market maker.
The private insurance industry has no interest in pursuing this. A society-wide system would require a mandate, which would necessitate low premiums and invite state regulation to prevent excess profits or bilking. As we've seen with Obamacare, this sort of intervention will only be supported by the insurance industry if they fear greater losses due to rent-extraction by other sectors (i.e. the medical industry).
The problem then is not merely an ideological failure to envisage a pro-social market, but the refusal of government to be a market-maker other than in the context of privatisation.
Posted by: Dave Timoney | March 03, 2015 at 04:17 PM
Three separate thoughts.
1 ... Or, take a job which offers CPD. Add not just to your earnings but your future earnings potential.
2 There are examples of individuals monetising and derisking their future earnings potential - David Bowie did this.
3 Money isn't everything.
Posted by: Stuart | March 03, 2015 at 05:16 PM
This article seems to be somewhat lacking in ambition.
For example, in the Mondragon co-operatives they haven't actually fired anyone in almost their entire history, they have a robust and successful retraining programme, among other things.
And socialists once believed that people shouldn't be tied down to one career path anyway, whatever the market indicators say.
Posted by: Deviation From The Mean | March 03, 2015 at 05:56 PM
Since the information about the future labor market is unknown and in fact unknowable, on what basis will the insurers offer their contracts?
Otherwise, it would be gambling, contrary to the Insurance and Gambling Act 1772, whose principles survived the test of times for good reasons...
Posted by: Jacques René Giguère | March 03, 2015 at 08:51 PM
Deviation From The Mean
Offhand, do you know what happened to the people from Fagor?
Posted by: Ibexsalad | March 03, 2015 at 08:56 PM
Ibe - around 1000 or so were relocated to companies within the Mondragon cooperative. in difficult times it really was a story of human solidarity. A capitalist firm would simply have thrown the bone into the cesspit and let people fight over it.
Mondragon swims in a capitalist sea so imagine what we could achieve without capitalist relations.
A lesson for us all.
Posted by: Deviation From The Mean | March 03, 2015 at 09:13 PM
Thanks. Iirc, they weren't legally employees and had no right to the dole.
Posted by: Ibexsalad | March 03, 2015 at 09:28 PM
A couple of quick objections:
1. Regardless of how efficient you believe markets are at predicting, they can't predict base don information which isn't there. You just gave a number of ways in which young people face fundamental uncertainty - how exactly can markets deal with this better than individuals if it depends on things which are completely unpredictable?
2. I would worry about speculation here. Hedge funds decide to short, I don't know, cleaners - will this have no effect on the profession? You seem to believe markets can be benign and only reflect fundamentals, rather than influencing them.
Posted by: UnlearningEcon | March 04, 2015 at 07:54 AM
There are basically three potential long term scenarios for the future - 1) is continued economic growth like we have seen for the last 200 years or so 2) rapid economic collapse, where everyone becomes significantly poorer. 3) A Japan style long term stagnation. For the first scenario, it is largely irrelevant from a absolute sense how a young person invests - society will be so much richer due to the power of compound growth over multiple decades that even someone with no assets would be easy to support. Investing in this scenario is therefore largely about the relative ranking versus your peers, which is a zero sum game from the point of view of the country as a whole and therefore should not drive policy. In the second scenario, again your investment strategy is irrelevant since most people will be starving to death and most assets, even real property like houses, are worthless.
Only in the third scenario does investment choices matter in the sense that you would prefer your retirement to be guaranteed tuna versus a probabilistic outcome of equal chance of cat food or caviar. So I conclude you should set policy and invest as a individual assuming this scenario. In other words, avoid equities and risky investment like land, focus on cash and cash like assets, preferably inflation protected. Government bonds are a good bet too.
Posted by: ChrisA | March 04, 2015 at 09:22 AM
UE asks two good questions
on 1. I reckon the uncertainties surrounding any particular career choice resemble the uncertainties on any particular listed company on the stock market. Having to pick a single stock to hold for life would be an insanely difficult decision. Yet we have a stock market, because investors can hold more than one stock, and as time passes, information emerges, investors and prices can react. So markets can deal with uncertain futures better than individuals, in this context, because individuals are being asked to make a single big bet but markets aren't.
2. what are the mechanisms via which a hedge fund shorting cleaner futures would feed back to cleaners. If I understand correctly, cleaners would buy policies that pay out if cleaner futures fall (i.e. the are compensated if it looks like their earnings are going to fall) so if hedge funds drive down the price, cleaners benefit. Then I suppose some cleaners might take the money, decide to leave cleaning, supply of cleaners would fall, wages go up? Maybe. What if hedge funds go long, and drive clear future prices up? Cleaners don't get a payout, hedge funds will lose money if it eventually becomes clear cleaner wages are not going to rise, anybody who held then sold high would make money, where is the cost to cleaners? One scenario could be that future cleaner earnings do actually fall, but cleaner future prices were slow to reflect that, so some cleaners did not get a payout they should have, yet still paid out for the polices. So that would be a bad outcome.
But of course it's daft only to think about possible bad outcomes and ignore the possible good ones - that way you won't do things that are on net positive.
Posted by: Luis Enrique | March 04, 2015 at 10:13 AM
I agree with Luis on 1. Stock prices are based on essentially unknowable information about the future prospects of individual companies. The stock market harnesses the wisdom (and sometimes, admittedly, the madness) of crowds to make a better prediction than each individual.
And by holding a portfolio of shares, the risk can be diversified. An investor has eggs in many different basket, if he makes a bad bet on a single company it won't hurt him too much overall. A worker, however, will have all his eggs in their job. If that goes wrong their entire livelihood is at stake.
The idea of macro markets aims to reduce this inequality in the ability of people to manage the major risks in their lives.
Posted by: Steven Clarke | March 04, 2015 at 10:51 AM
As a young person, I found this post fascinating.
Occupational insurance markets would be interesting if only because wage information would finally be centralised, reviewed and mediated. Employers, certainly in Ireland, but also I find here, are very hesitant to mention numbers and certainly not the numbers they give to coworkers and superiors and so forth. Such is the capitalist conspiracy to suppress the market in labour by undermining price discovery - ironic when capitalists aren't pro market isn't it?
Not.
UNUM do something similar in a way. But they're biggest asset may be their actuarial tables on the topic. Unfortunately their models may tell you more about the probability of employment ending completely rather than a slow stagnant decline in income that many occupations face in the real world.
Chris mentions making money ASAP as an optimum strategy. Thats fine. But my take is slightly different in that I'm aiming to invest in my most important asset - 'human capital' more than make oodles of money per se.
Posted by: Icarus Green | March 04, 2015 at 11:37 AM
> " the government's "triple lock" "
Except that may not go on until retirement, and also that the age of collection moves up apparently to favour the boomers, meaning that youngsters may not live long enough to collect at all.
Posted by: Pseudonym | March 04, 2015 at 02:30 PM
Why should young people have any confidence about their counterparties actually paying up on any futures contracts? (And where would they get the capital for bets of the size that would be necessary?) It is also so that such bets on occupational pay are not sufficient. If their occupation is a winner-take-all market (and more are becoming so) then the average (or even the median) pay may be irrelevant to them.
Posted by: reason | March 04, 2015 at 02:46 PM
I'm actually a private insurance skeptic. Insurance is where you give somebody money now, for the possibility that they will pay you back for some PARTICULAR eventuality in the future. And they have a clear incentive to find some way not to pay (so keep a lawyer in your pocket).
This can work well for very low probability high payout risks, but I don't think it works well for high probability, lower payout risks. What people really need is not coverage against a multitude of difference risks (with all the management and administrative problems associated with that) but comprehensive security against all risks (so they can face the future with confidence). So why aren't you pushing your line on Basic Income here?
Posted by: reason | March 04, 2015 at 02:54 PM
reason,
fwiw, I am sympathetic this idea could be a complex hammer to crack a nut better cracked by - say - BI. And yes if you haven't got any money to start with then these things aren't much help. But I don't see trust much differently from my trusting a building society to give me my savings back, and really ain't this just like a savings product, except the interest rate you are paid is tied to (say) expected earnings in your chosen career? (although that leaves unemployment risk uninsured, which may be the larger problem)
Posted by: Luis Enrique | March 04, 2015 at 03:06 PM
I rarely agree with the ideas on this blog, but this is a great, great article.
People have to realize that youngsters today DO face vastly more uncertainty than their parents and grandparents.
It's easy to prove it too.
It's fairly obvious that our ability to predict the future of various jobs declines as the pace of technological change increases if we assume that technological change changes the nature of jobs (clearly it does).
It's also completely obvious that the pace of technological change has increased dramatically in the last 15/20 years.
Therefore, it is dramatically harder for people having to make career decisions now to predict which jobs will be viable and plentiful in the future than it was for people that grew up in the 50s and 60s.
This is a serious issue, especially because our educational institutions have done NOTHING to help young people deal with this rapidly increasing uncertainty.
Also, it is the people who grew up in the 50s and 60s that are making government policies right now, so it's people who never had to deal with this uncertainty that making decisions on behalf of the youngsters who are having to deal with it right now.
Really hope this article gets more visibility.
Posted by: WVO House | March 04, 2015 at 04:43 PM
The Jews, who often faced great uncertainty in the past, tended, I am told, to concentrate on portable skills like tailoring. It seems obvious that the best course for a young person today is to look for a career that gives them portable skills and not just knowledge and skills that are particular to one employer or even one career.
They certainly shouldn't be putting their trust in insurance companies, who are, IMHO, even less to be trusted than politicians.
Posted by: Bayard | March 04, 2015 at 06:11 PM
Luis Enrique,
no it's not the same, you know a building society will give you your money back, you (at least you should) have much less faith that an insurance firm will honour your claim or a (potentially anonymous) counterparty to a long futures contract will still be solvent when the contract is due.
Posted by: reason | March 06, 2015 at 10:39 AM
reason
people do buy life insurance. I don't think this idea would entail relying on counterparties to a futures contract, I think you'd buy it from Axa or similar. it wouldn't be like an insurance claim the provider might piss about trying to refuse, it would be like an index-linked savings product. At least, I reckon.
Posted by: Luis Enrique | March 06, 2015 at 10:57 AM