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The Post-Employment Economy, Part 4: Employment “risk”

In my ongoing series on post-employment, I continue on the theme introduced in the second part, namely the waning of the “employment promise” that drove economic growth and American culture in the post-war years. The most significant erosion of the employment promise in the last thirty years has involved income security. Americans, who in the first half of the nineteenth century were mainly entrepreneurs rather than “employees,” in the latter half of this century willingly gave up the lion’s share of the monetary value of their work, their ideas, and their energy in exchange for income security. This created an entirely separate class of people who were willing to trade income security for the lion’s share of the monetary value of their work, their ideas, and their energy — entrepreneurs. The traditional definition of entrepreneurs, however, involves risk. Entrepreneurs are risk-takers and their gainfully employed bretheren are risk-avoiders. Among the many risks entrepreneurs are willing to take, the biggest and baddest is income volatility.

But the erosion of the employment promise in the area of income security means that “a job” involves significantly greater risks of income volatility than it did thirty years ago. And a new study by Jacob Hacker and Elisabeth Jacobs has measured the increased risk of holding a job. What’s important for our purposes, however, is that as the “risks” of employment gradually approximate the risks of entrepreneurship, more people will choose to be post-employed rather than employed. If the risk of selling your work and ideas in the marketplace are only slightly higher than the risk of having a job — and the rewards are potentially unlimited — why have a job? Why trade off so much of the value you’re creating just for the slightly better income security?

Professor Hacker and Ms. Jacobs have published an eagle-eye view of their study in the most current edition of The New Republic. If you like your economic insights heavily spiced with unrelated political pontificating, then you can read the article here. However, their quantification of the increased risk of job-taking has deep relevance for anyone considering a post-employment shift, like starting a new business or simply becoming a contractor. Money quote:

In the data source we have used, the University of Michigan’s Panel Study of Income Dynamics, the chance that a working-age individual will experience a drop of at least 50 percent in family income over a two-year period has more than doubled from around 4 percent in the early 1970s to almost 10 percent in the early 2000s. The risk of at least one 50-percent drop in income over a five-year period has grown from about 15 percent in the early 1970s to about 23 percent in recent years.

Recessions exacerbate the problem substantially: Every recession since the early 1980s has ratcheted up the risk of a big income loss, with the relatively mild recession of 2001 producing income swings greater than those seen during the deep twin downturns of the early ’80s. Now that we’re facing a recession potentially far worse than that of the early ’80s, it is safe to assume–though the data does not yet exist–that the instability of family incomes in the next few years will dwarf anything our nation has seen for decades.

Part two of my post-employment series zeroes in on the erosion of the employment promise, but I come nowhere close to saying it as well as Hacker and Jacobs:

Increased income insecurity has occurred alongside slow (or no) income growth for all but the richest of Americans–among the well-educated as well as the poorly educated. In that same period, middle-class incomes barely grew at all, and what little growth did occur came only because families were putting in more hours of work. And what did they get in return? Less predictable paychecks, less comprehensive health insurance, less secure retirement savings, all adding up to family finances perched on the brink. The risk-reward trade-off looks more like a risk-reward rip-off.

Hacker and Jacobs are approaching the basic insight of my series: that “job-takers” are really “job-consumers.” People who sell their skills on the employment marketplace are, in fact, “buying” jobs. They are “buying” the various benefits of a job, and the greatest benefit is income security. People who seek employment are willing to pay for income security in real, quantifiable dollars. When I opened my discussion of job-takers as job-buyers, I quoted the teacher’s union representative in Washington D.C. explaining why teachers aren’t willing to give up tenure for a pay increase:

. . . job security is a substantial financial benefit, far greater than even a huge salary increase.

“Huge,” of course, is a mighty big quantitative field that ranges from, oh, say 20% of one’s salary to 50,000 times one’s salary (it’s safe to assume that all — no, make that most — teachers would sacrifice tenure for a salary 50,000 times greater than the one they’re getting). Now, no economist has actually put a value on that “huge,” but whatever it is, that difference represents the value that people are willing to give up just to have job security.

That difference is the true cost of income security. And over the last thirty years, the “employed” have been willing to give up more dollars for less security. How so? The last three decades have produced a remarkable gains in productivity. Since incomes have remained stagnant, increased productivity means that a greater percentage of an employee’s work, brainpower, and energy goes to management and investors. In other words, it’s not just that incomes have remained stagnant. Productivity has increased the economic value of employed work, but those increases have not gone to the employed. So everyone who has a job is paying more for that job than they did thirty years ago. What they’re paying for, of course, is income security and, to a lesser extent, outlays security (such as health insurance). But they are getting less of both for a higher cost. They are, as the numbers indicate above, getting half to a third of the income security they used to get.

And that, my friends, is the key that unlocks to the door to a post-employment economy. The primary reason entrepreneurs and the post-employed in general are willing to shed their steady income and take risks, including the megaton risk of income volatility, is to realize more of the economic value their work, ideas, and energy generate in the marketplace. An entrepreneur or solopreneur is not willing to pay the cost of having a job.

Since we’re on a teacher roll here, let’s take as an example an academic proletariat toiling deep inside the writing department dungeon of some private university. This writing instructor realizes very little of the economic value he or she creates. Part of that value accrues to the university, but the lion’s share actually accrues to the businesses and organizations that hire that teacher’s students and their skills — including the writing skills that poor beknighted writing teacher imparted in the sweatshop bowels of the university.

Now, that writing teacher does this sweatshop work because the steady paycheck pays the bills and the benefits help allay outlay shocks, such as big medical bills. But that teacher’s ability to train people to effectively write and communicate has an exponentially greater economic value than the university is getting paid for it — probably by a multiple of ten or greater.

Now suppose that teacher figures out that the whole thing is a rotten deal. The income security is not that great, the benefits suck, and the pay doesn’t even rise to the “suck” level. The teacher thinks, “Wait a minute. My ability to effectively train people to write is enormously valuable to the companies that hire my students. What if, instead of selling my services to the university, in which I take only the smallest fraction of my economic value in return for a steady paycheck, I try to sell my services directly to the marketplace? To individual businesses? Or how about to people on the job market? Or people studying for the GMAT?”

That teacher trades employment for post-employment. That person now takes possession of their labor in order to realize the fullest market value from that labor.

Now suppose that teacher thinks a little bit more. “Over the years, I’ve developed techniques for teaching effective writing and communicating. Because these techniques work, I can successfully sell my teaching to the marketplace and get a better deal than I’m getting from the university. But wait a minute. I’m not valuable. I’m just a writing teacher. What’s valuable is the techniques and methods I’ve thought up. Now, I can make money by selling my services, but I can make more money selling my method.”

Now that teacher is more than just post-employed; that person is now an entrepreneur. The transition is this: the fullest economic value anyone can realize is not from what they do, but from their ideas. Simple post-employment, which is putting your work on the open marketplace, has an unresolvable constraint: the amount of work you physically can do. Putting your ideas on the marketplace has a potentially unlimited upside.

And that, ladies and gentlemen, is the difference between an entrepreneur and the rest of us. Entrepreneurs “own” their ideas as well as their work and their energy. Entrepreneurship is not about risk. Or heroism, John Galt style. It’s the simple fact that entrepreneurs take full possession of their ideas and creativity. No-one who collects a paycheck can say the same thing.

Both contracting your labor and monetizing your ideas, however, involve the exact same risks, the most important being the risk of income volatility. And this is where Hacker and Jacob’s numbers are so important. Several currents are running together to produce a perfect storm. First, the “new economy” makes it possible for anyone with a good idea to become a viable global business with significant worldwide infrastructure with little or no investment. Second, as the risks of having a job increase, the difference between employment and entrepreneurship declines and more and more people will turn to post-employment alternatives. The risk of having a job makes the risk of starting a business less onerous. Finally, there’s a cultural tipping point. Michael Moore is fond of saying the American dream of making it rich is a fraud, which at one time it may have been. When I was a child, we didn’t have wealthy entrepreneurs being newly minted every other day. We were lucky to see one every year. But even in the midst of a recession, newly wealthy entrepreneurs keep arriving at the bus stop with alarming frequency. And the numbers bear this out. At a certain point, entrepreneurship will be less of a deviance and more of a cultural role model. It will be the way people think.

Of course, there is one fly in the ointment. A pretty big fly, actually, and one that we’ll deal with in part five. A job not only provides income security, it also provides a safe haven from the marketplace. Once safely ensconced in a job, an employee no longer has to fret about the market. For that reason, employees are always task-oriented. But the full value of one’s work and ideas can only be realized in the marketplace. All the successful entrepreneurs I’ve known, worked for, and interviewed over the years are naturals when it comes to surfing the marketplace. They are not task-oriented, they are customer- and market-oriented. The gulf between thinking in tasks and thinking in customers and markets is so wide as to seem unbridgeable. But it’s doable.

So look for part five. Same bat-time. Same bat-channel.

Here are links to the other parts in the series:

The Post-Employment Economy, Part 1
The Post-Employment Economy, Part 2: The Employment Promise
The Post-Employment Economy, Part 3: The 10% Employee

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