Your income is probably your most valuable asset. Is it secure?

Risky business.
Risky business.
Image: Reuters/Andrew Winning
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When I tell my finance students they are sitting on an asset worth more than a $1 million, they never believe me. The asset is their future earnings, what economists call human capital. The value of your human capital is a function of your skills, education, and know-how, which determine what your labor is worth. We often don’t think of future income as an asset, but in many ways it’s like a bond, which offers a regular pay-outs during the years you work.

There are some things that make future earnings different from other assets. You can’t sell future earnings today, and they are hard to borrow against. The lack of liquidity is one reason people tend to discount the value of future income. Another is risk: Like any asset, income isn’t guaranteed. At the beginning of your career, you don’t know how much you’ll earn, or what will happen to your earnings from year to year. During what should be your highest earning years, around age 50, you could lose your job, or be forced to take a pay cut. Financial theory assumes riskier assets are less valuable.

In recent years, forces have conspired to make lifetime income feel less predictable. Technology or cheaper workers abroad can eliminate your job. Employers don’t offer the same regular hours and dependable pensions they once did.

If income, the most valuable asset of many Americans, has gotten riskier, then they are in a sense poorer. But there are steps they can take to reduce risk.

Is income really riskier?

Yes and no.

Jobs feel less secure because it seems they don’t last as long. There exists a perception that millennials have no loyalty, and jump from job to job. There is also evidence employers have less loyalty to their workers. Many firms no longer hire administrators or janitors for staff positions that come with protections and benefits. They now outsource these jobs to contractors that may not offer severance or employment protections.

But in fact, job tenure has been trending up. Median tenure was five years in 1983 and rose steadily to 5.4 years in 2014, before dropping to 5.1 years in 2016 (people tend to change jobs more in a booming economy). Some of the increase in tenure came from more women staying in their jobs after they had children. The trend is also because very short tenure has become less common. In 1983, 26% of American workers had been in their job for less than a year. In 2016 it was 21%.

Very long tenure—more than 10 years in the same job—is less common for men. In 1983, 32.1% of men had been in their job for more than 10 years, while in 2016 that was true of 30.3%. (Over the same period, women in long-tenured positions increased, because they no longer left work after having children.) Americans do enjoy more stable employment relationships now, but there is also some truth to the belief that lifetime job security is less common.

The job-switching patterns explain most wage variability. Most big raises happen when people change jobs voluntarily and big drops happen when they are sacked. Less job switching may explain why economists estimate that, by some measures, income has not gotten riskier. In 2015, economists Fatih Guvenen, Fatih Karahan, Serdar Ozkan, and Jae Song looked at Social Security records and estimated that income variability—the amount a worker’s income typically goes up or down each year—has been steady since the 1980s, and may have even declined.

Of course, risk is relative. The team of economists also found that during recessions, there is more negative skewness. Increased negative-income skewness means income drops are bigger than income gains. If a worker’s income drops when the economy tanks, either from a job loss or their employer cutting their pay, income falls more than it did in the 1980s and 90s. So, for most workers, employment conditions haven’t gotten too much worse, but in a recession, if things go wrong, they can go much more wrong than before. Big income drops in recessions are an especially dangerous kind of risk, because your partner is also more likely to lose a job and your stock portfolio drops.

These patterns may explain why people feel more economic anxiety since the 1980s and 1990s, even if, most of the time, income is more predictable and steady than it was for earlier generations.

What can you do to reduce income risk?

As with any financial asset, it is possible to reduce income-risk exposure with a clear strategy. One possibility is to take less risk to start with. That could mean pursuing a more stable job, such as government positions which tend to offer steadier pay (unless there is a government shutdown) and longer tenure than jobs in the private sector. Granted, you won’t get rich working for the government, but that’s the price of more security.

Another option is investing in more education. Education is no guarantee of higher earnings, but it is probably the best hedge for income risk. A college degree not only boosts your lifetime income, but college graduates face much lower rates of unemployment, even during recessions. If they do lose their job, college graduates don’t stay unemployed for as long. But an investment in education shouldn’t stop after graduation. Maintaining the value of human capital requires constantly learning new skills and keeping your network of contacts active.

Nervous workers can also diversify their employment. One of the more surprising recent findings is that, despite increases in contracted manual labor and gig work, the number of Americans in contingent employment has not increased. Evidence finds that lots of people, and more than ever, are doing gig work like driving for Uber, but they’re doing it to supplement their main job. Gig jobs act as both extra income and insurance against lower wages.

It often feels like jobs are riskier today, but it turns out jobs are more stable and income is usually not more variable. If things go wrong, however, they can go very wrong. Understanding the risk you face is the best hedge to protect yourself for whatever comes.