Welcome to the 50th (!!!) issue of Allison’s Ode to the Second Moment, a newsletter about the risks that everyone feels but no one talks about: human capital edition.
Another encouraging jobs report came out, it featured a slight increase in wages. Even that stubborn, prime-age labor force participation rate is finally trending up. Labor force participation among 25–54 year-olds remains 2% lower than its turn-of-millennium peak, but it has been increasing since 2016, suggesting the labor market is finally vigorous enough to lure disaffected young men out of their parents’ basements.
The report does not give a complete picture of what’s going on with workers. The Fed released its report on the Economic Well-being of U.S. Households in 2017, which offers a more complete view.
Its survey estimates that the number of adults engaged in so-called “gig work” is up to 31%, up from 28% last year. About 43% of 25–34 year-olds have some kind of side hustle. Many, about 39% of Americans with a gig job, already have a main job and are doing the work for extra money. Only 16% of Americans do gig work to earn their primary income. For most families, gig work makes up less than 10% of household income. Yet, families put a high value on their gig work income, especially less educated households. The Fed speculates it could be because households view gig work as insurance against wage shocks. It maybe diversification or a hedge, or maybe a little of both.
Most gig work is still offline, but online service jobs (like Uber and TaskRabbit) are becoming a bigger source of potential work. These trends raise some under-studied issues with the labor market. Is gig work rising because there is more of it, did workers before want gig work but lacked opportunities? Or do workers sense more risk?
Mainstream Media Bias
Yes, the media is biased. No, I am not talking about politics. I am talking about investments. The media appears to have a bias toward investing in housing instead of human capital. There have been several stories, following a report from the Fed, bemoaning the fact that Millennials aren’t buying houses because they are weighed down by student debt. But there is a different way to look at it: A young person can take out loans and either invest in education or use that money to invest in a house. What sounds more sensible?
A more global, competitive economy has increased the gains from education. Yet, traditional measures of wealth, which don’t include future wages, do include debt and housing equity. The result is younger Americans, who invest more in education, appear less wealthy than previous generations. I suppose, in all fairness to the media, our traditional ways of measuring wealth are also biased toward investing in housing over education.
True, you can overinvest in human capital, pay an interest rate that’s too high, and sometimes the investment won’t pay off. That’s also true for housing. I’d bet that overinvesting in housing ismore common than overinvesting in education. Though spending too much on a house is rarely front-page news.
Assuming you finish your degree, education is often a better bet. It can increase your earnings significantly more than housing appreciates (if you don’t live in NYC).
Minimizing Education Risk
Now, it is true that education does not always pay off. The cruel thing about an education investment is the rate of return is lower (but still positive!) for low-income Americans. They are most likely to drop out of college. Dropping out can be the biggest risk when you make a bet on education. Half a degree does not increase your earnings very much. For poor households, education is a higher-risk, lower-return investment than for everyone else. Imagine if the stock market discriminated this way. If we are going to be outraged about student debt, perhaps this is the issue we should focus on.
The Atlantic has an interesting story about a community college in Texas that is doing all it can to increase the returns from education and decrease risk. Low-income students are at higher risk of dropping out because they face more financial risk. For example, a car repair or water bill can mean financial ruin and cause them to drop out. The college has a fund to help with financial emergencies. Reducing their students’ financial risk has been critical to keeping them in school.
Lower-income students are also at risk because they have worse academic preparation and emotional support going into college, and the college has people on hand to help. So far, the program is increasing graduation rates, though there are concerns about eroding academic standards.
A similar program in NYC community colleges has also been effective, and these colleges have more than doubled their graduate rates.
These programs are expensive and labor-intensive, but they appear to pay off and are probably a better use of taxpayers’ resources than subsiding high-earners’ graduate loans.
One pension story--after all it is the 50th issue
The cash-strapped state of Illinois is offering pensioners a lump sum payment in exchange for reducing their cost-of-living adjustments. That is probably a bad idea for pensioners. If they live a long time their income won't keep up with inflation. In thirty years their pension's purchasing power could fall in half (state workers retire early); not to mention they'll bear the risk inflation will increase more than people expect. Jeff Brown is worried most people will take the lump sum because people like money today and don't always appreciate risk reduction. After years of low inflation, many people have forgotten it is a risk at all.
In Other News
Variable annuities are staging a comeback.
Neil Irwin argues tariffs aren’t the problem; instead, it is uncertainty around future policy.
East Germans take less risk—another legacy of Communism.
Raising the minimum wage has unintended consequences.
Until next time, Pension Geeks!