Known Unknowns

Regulatory constraints


Welcome to Known Unknowns, a newsletter that still believes—despite evidence to the contrary—that we can have a well-functioning annuity market.

The labor market: Binding constraints, Part 5000

It seems to be true that people respond to incentives, and the disappointing jobs number suggests that labor supply matters. As schools fully reopen and the UI bonus is eliminated, we’ll hopefully get back to a new normal for the labor market. And I’m curious about what will happen to wages, which are rising, in the medium and long term. You can’t increase wages now to lure people back and then lower them when the UI benefit is cut. Even temporary measures that boost wages today could have a long term effect. I hear people on Twitter arguing that it’s good that the UI bonus is large, because it will force employers to pay more—and if they can’t, that they should go out of business. This is also an argument for a very high minimum wage.

But where does that money come from? This is an especially important question for small business owners who operate on tight margins and must compete with the Home Depots of the world, and thus can’t raise their prices. I’m not so sure that they should go out of business. If employers couldn’t afford to pay people a market wage because they weren’t productive enough, then fine—that’s life, creative destruction and all that. But when they can’t pay a wage because of a government policy that makes it artificially high, that’s a different story. Effectively, we’re regulating competitive (in the economic sense) businesses out of existence. And I think it’s very strange that policy is doing so much to favor monopolistic firms with big profits.

The future of virtual work

One of my favorite economic historians, Joel Mokyr, has a great essay in City Journal this spring in which he puts the current technology boost in perspective. Technology has long aimed to overcome the constraints of space and time in order to imitate life. From cave paintings to record players to streaming movies, we’ve gotten progressively better at reproducing human interaction.

Mokyr’s expertise is on the industrial revolution and its effects on work. It seems so normal now that we have a single employer who tells us where to be and what to do, but when people first worked in factories, it was a very strange development, and many people found what we call normal workplace dynamics to be degrading. This past year forced us to adopt technology that made remote work possible for many of us, and it may mean a shift back to our original way of working from home and setting our own hours.

However, many employers are now announcing that everyone must go back to work in person, at least some of the time. Culture is important, and so is mentoring younger staff members. Climbing the corporate ladder requires senior employees becoming invested in your success, partially because you’re a good at your job—but also just because they like you. And it’s hard to make people become that invested in you over Zoom, no matter how charming you can be over video chat.

I’m not sure that even hybrid work models will stick. Working from home may be the new “not responding to emails during the weekend.” It’s technically an option, but people who show up every day will be seen as more dedicated and a more valuable part of the conversation. So even if we can work remotely and even be more productive that way, it’s hard to see it sticking for most people—at least if you’re the ambitious one in your office.

Mokyr hopes that we’ll adapt the technology in order to remove the worst parts of in-person work, and it will be interesting to see what those turn out to be.

Chile proves that we can’t have nice things

I’ve always been a fan of the Chilean pension system, even though Chileans don’t seem to like it as much as I do. I understand that there are problems, including spotty coverage for people in the informal labor market, not enough insurance for low earners, and some high fee investments. But it was mostly a good example of making a DC system work. People saved, invested, and annuitized (they had a great annuity market), and Chile isn’t facing the fiscal reckoning that every other country is with their underfunded (or not funded at all) DB state pensions.

But maybe people just don’t have the necessary self-control to save enough for their retirement. After all, if we have money in an account, we’ll want to spend it, even if we’re retired. Chile is going to let people take lump sum withdrawals from their annuity, which seems like a case study in adverse selection. How can insurance companies survive? They didn’t price annuities with this feature, and we know from the U.S. market that this option is very expensive.

That’s the problem with fully funded retirement accounts: maybe we’re just too impatient.

In other news

I have a short essay on not breaking up big tech.

Until next time, Pension Geeks!