Signs abound that Americans have grown averse to taking economic risks. Compared to their forebearers, for example, Americans today are far less likely to move, switch jobs, or start a business.
Some blame this decline in economic “dynamism” on a shift in attitudes and bemoan Americans’ growing complacency. Others point to constraints such as barriers to entry that confront today’s start-ups in concentrated markets, the increased use of non-compete clauses that make it difficult for workers to leave their employers, and land use regulations in high-productivity cities that have denied many access to the opportunities available in urban innovation hubs.
It is likely that all of these forces are playing a role. Yet here is another factor: what if the sheer instability of many workers’ incomes is itself helping to depress the venturesome spirit?
Such a conclusion, after all, is one possible interpretation of a recent book titled The Financial Diaries by Jonathan Morduch and Rachel Schneider, of New York University and the Center for Financial Services Innovation, respectively.
As Morduch and Schneider report in their study, American household incomes are extremely volatile, and getting more so, with the greatest pay volatility being visited on the low- and middle-income families least able to manage it.
Why is this? To begin with, the spread of service work and the decline in the number of unionized manufacturing jobs have led to less stable employment arrangements as workers’ bargaining power has diminished. At the same time, income volatility has increased with the spread of digital staffing algorithms and “on demand” work arrangements that allow employers to increase their efficiency by continually adjusting staffing levels and workers’ hours.
Put it all together, as Morduch and Schneider do, and it’s clear that while management innovations are enabling firms to minimize costs and maximize profit in new ways, they are also wreaking havoc on the finances and mood of many workers.
On the financial front, Morduch and Schneider discover from their study of the week-to-week earnings and spending records of 235 households in 2012 and 2013 that beneath many families’ steady-seeming annual earnings, millions of workers experience massive month-to-month swings in their take-home pay that throw many of them into poverty for portions of the year. For many of these workers, income volatility is not the exception; rather, it’s the norm. Witness the wild swings in monthly earnings experienced by Janice, a casino dealer in Mississippi interviewed in The Financial Diaries:
As to the mood in such households, it may not be conducive to “dynamism.” For many Americans, suggest Morduch and Schneider, a desire for more control has begun to trump the impulse to pursue the kinds of economic opportunities that may ultimately move them up the income ladder. For example, one Ohio truck mechanic featured in the book was tired of taking home inconsistent paychecks in his hometown job and eventually quit to take a position farther away from his home with a lower annual pay. In this instance, trading a higher annual salary for month-to-month stability came as a great relief.
This story does not appear anomalous. In 2014, the Pew Charitable Trusts asked 7,000 Americans if they would rather be a little richer or have a steadier, more stable financial life; 92 percent of them chose stability over mobility, a significant increase from the 85 percent who said the same when asked in 2011. This adds to the growing suspicion that excessive uncertainty in the workforce in recent years may well have weakened the nation’s appetite for risk. Deprived, in short, of a little peace of mind, too many workers appear to be feeling less game for the rigors of risk-taking and entrepreneurship than they otherwise would under different financial circumstances. It will take more than the recent few years of tightening labor markets to stimulate more risk-taking given today’s changed workplace, suffused as it is with workforce insecurity, digital staffing programs, and volatile take-home pay.
So what could restore enough stability to help promote more risk-taking?
Don’t hold your breath for near-term action at the federal level, but Rep. Rosa DeLauro (D-Conn.) and Sen. Elizabeth Warren (D-Mass.) have introduced bills in both chambers of Congress that would enable employees to request scheduling changes without retribution and require employers to provide more predictable and stable schedules for their employees. No action has been taken since and the bills’ co-sponsors remain exclusively among the Democratic ranks. Still, the bills are a welcome step in the right direction.
Turning to the state and local realm, by contrast, several jurisdictions are already moving forward with reforms to increase the predictability of jobs and promote fair scheduling practices. This summer, Oregon became the first to adopt a statewide measure requiring a two-week scheduling notice. Likewise, state representatives in Wisconsin and New Hampshire have tried to follow in Oregon’s path by introducing their own fair scheduling bills. In the meantime, Seattle, New York, Washington D.C., San Francisco, San Jose, and Emeryville, Calif. have all passed similar laws. Some ensure employees the right to predictable pay by requiring employers to pay a premium if they make last-minute scheduling changes. Others require employers to offer extra hours to their part-time employees before hiring new staff.
In addition to increasing employer accountability, making simple reforms to public assistance provision can also alleviate the burdens that accompany volatility. For example, the Earned Income Tax Credit (EITC), upon which many lower and middle-income families depend, is delivered as one lump-sum payment. Instead, a periodic payment system would help smooth income month-to-month, enabling better financial planning. Additionally, a group of scholars from The Century Foundation recommend a partial unemployment benefit system that would help sustain the incomes of part-time workers whose hours have been cut from full-time status.
Along these lines, the policy shifts already achieved at the state and local level along with a number of viable, commonsense proposals on the table appear promising. However, policy is not the only thing that needs to be modified. The public conversation needs an update as well. While the economic lives of Americans and the challenges they face have changed dramatically in recent times, the way we talk about the challenges they face hasn’t. This is a failure of both the left and right political discourse. On the left, the challenge of income volatility has not yet been taken up by the income inequality conversation, as income spikes and dips are not explained by gaps between those at the bottom and middle and those at the top. In fact, income instability is rising faster than income inequality. Similarly, a conservative conviction that those failing to manage their personal finances are either irresponsible or financially illiterate also ignores the causes and depth of the volatility problem.
For those who bemoan collapsing economic dynamism and the fading American Dream, it’s becoming clear that a level of baseline stability provides a springboard from which risks can be taken, and that springboard is disappearing.