It took just two weeks to exhaust one of the largest bailout packages in American history. Even the most generous financial support has limits in a recession.
However, I am optimistic that a pandemic-fueled recession and mass underemployment could be an important opportunity to upskill the American workforce through loans for vocational training. Financially supporting education and living costs would allow workers to use their idle time to learn a new trade, and with their increased income, pay back into a pool of funds to be reinvested.
To better explain how this works, I will give an example from an cash transfer economic field pilot I’ve been running for the past year.
One candidate for a cash grant, a formerly homeless single mother of color aiming for a computer programming internship, was referred to me last year from a nonprofit vocational school. After listening to her story, I learned that she had quite deftly weaved together different mental health and educational resources on her way to a coveted job opportunity, but she had exhausted public resources and needed additional funds. I told her that I would give her the money she needed to live and travel, provided that she voluntarily pay me back a percent of her income if she got a high-paying job. Also, if I re-invested what she paid back, I wanted her to mentor others in a similar circumstance.
I’m happy to report she got the internship, paid me back and, perhaps most importantly, has advised another single mother, who just landed her first coding gig during the pandemic.
Inspired by stories like these, I have since retooled my economic pilot, which was originally a fixed-pool of basic income-like cash giveaways, into an equity loan program to help COVID-impacted workers learn new skills.
The strategy that allows me to make investments is a relatively new financial instrument called an “income share agreement”. Income shares are loans, but instead of taking a fixed amount back in repayment regardless of how the recipient uses it (a ‘debenture’ loan), they take a percent of the recipients’ total income only if they meet certain growth benchmarks (an ‘equity’ loan).
Income shares have become most popular as an alternative to tuition, mostly for high-stakes coding bootcamps in Silicon Valley, which take rather a large personal stake (over 15% of a recipient’s income for up to 5 years). As such, they have been criticized as potentially discriminatory toward lower-income individuals and more financially burdensome than traditional student loans, even if it were possible to get them for alternative providers like bootcamps.
For low-income individuals, the criticism of traditional income shares are valid. Fortunately, a small cottage-industry of non-profits have been experimenting with more low-income friendly Income Share terms. For instance, I invested with Bay Area-based Climb Hire, which targets low-income workers and trains them for the growing job category of SalesForce administration (a customer management relations software). Climb Hire requires just $150/month in repayment if they secure a job making over $45,000 per year. The nonprofit then re-invests the money in new trainees.
“I like the idea of paying forward,” one of Climb Hire’s recent grads told me. As an immigrant who had been waiting tables and driving Uber, she liked the idea of a living stipend and no-up front tuition in exchange for paying back if she got a job. And, thanks to her training in a remote-friendly occupation, she was able to secure an internship during the pandemic.
Skeptical readers may question how this is possible, since retraining programs have a pretty dismal record. As I’ve previous written for Brookings, re-training does work, but takes a lot more time than many people expect. It can take 1,000 hours or more of not just school, but volunteering and job search to eventually land in a new career. The vast majority of workers cannot go to schools or take on networking opportunities, which often require full or part-time hours that conflict with taking care of a family.
The silver lining of pandemic-fueled underemployment is that it grants people the very time they need to successfully pursue retraining. While family obligations are still a concern, underemployment and the flexible hours of remote classes and internships are still a comparatively greater opportunity for training—at least, so far, for the participants we work with.
So, for a policy-oriented audience, the question becomes, what is the government’s role? There are a few options I have seen thus far.
One option is to act as an investor. Public and philanthropic dollars can take equity stakes in low-yield projects. The Small Business Administration has a history of investing with, for instance, investment funds (in a so-called ‘fund of funds’ model).
The nonprofit Social Finance has developed an investment instrument called a “career impact bond“, which is a large investment loan pool of workers; this impact bond yields a positive return, but less than is expected in for-profit investments (less than a 10% return on investment).
Other cities, such as New York, are taking a more exploratory approach, aiming to use public funds to partner with income shares providers to see if they might be a better path for workforce or education loans.
I think that investment from public entities will work better than them piloting or administering these new strategies.
I came to this conclusion by learning the hard way; originally, my pilot program was not just supposed to give out cash grants, but to explore how local governments could run their own economic experiments (read more about the theory behind it in this Brookings post). After a frustrating year, I learned that governments are simply not set up for welfare innovations. Learning requires failure and accountability. I found that agencies were extremely averse to publically committing to releasing data regardless of outcome, and to rapidly iterating the strategy for how they gave out income. Most wanted extended deliberations with all stakeholders, and that does not work with rapid iteration.
Agencies (and agency employees) are mandated by law to deliver services in a democratic fashion, regardless of outcome. In order to innovate, people’s jobs and budgets need to be on the line. Public sector organizations are not designed to be outcome-oriented enough for income shares, but at the same time, it is difficult for private organizations to expand access to new populations without funding for research and development of programs for the unique needs of lower-income recipients.
During my interviews with people who ran income share pilots, I learned of one partnership which had targeted disadvantaged and minority students with a reputable high-tech vocational provider. The pilot fund lost money because many students either did not get jobs or the jobs were not high-paying enough.
This mirrors my own experience: many of the recipients I loaned money to never paid back. Many dropped off from communication, and even the ones I consider an initial success may have difficulty down the road.
It is possible to overcome these challenges, but it will take dedicated research and exploration with the help of public-private partnerships. The more governments experiment with replacing or supplementing cash welfare with income shares through private sector partners, the better we will become at learning how to help underemployed workers come out of this pandemic better than they entered it.