Risk, Insecurity & Public Policy Lars Osberg Dalhousie University October 24, 2002 National Policy Research Conference Ottawa

Plan: “Risk”, “Insecurity” & their differences Evidence on Trends (esp. Canada) Economic risks from unemployment, ill health, single parent poverty & old age Mechanisms to reduce Risk & Insecurity The Welfare State & its alternatives Is the Language/Analysis of Economics Adequate to the Task? Policy Implications

“Risk” Economics Literature “risk” – 21,466 “hits” in ECONLIT (1969 – July, 2002) “economic insecurity” – 20 “hits” in ECONLIT “Risk” “probability distribution over future states of nature” “event with probability distribution” Diminishing Marginal Utility implies Risk Aversion “Certainty Equivalent Income” < Expected Income Symmetric in Gains/Losses; rational calculation of both Income “Mobility” & Income “Risk” Does high mobility/risk offset or accentuate inequality ?

“Economic Security” Risk of income loss from unemployment changes in employment rate x UI coverage x UI replacement rate Financial Risks of illness medical expenses as share of disposable income Risk of single parent poverty poverty rate & gap for single women with children divorce rate of legally married couples Risk of poverty in old age chance x depth of elderly poverty

INSECURITY UNEMPLOYMENT Employment/population ratio (less variable than unemployment rate) % of unemployed receiving UI/EI benefits Average UI/EI benefit as % average weekly wage ILLNESS Uncovered health care costs as % personal income Loss of earnings not yet modelled (increased % self-employment & contingent workers increases risk exposure)

INSECURITY (continued ) “WIDOWHOOD” - LOSS FOR WOMEN/CHILDREN OF ACCESS TO MALE EARNINGS - “ONE MAN AWAY FROM POVERTY” [Probability of Divorce]*[Female Single Parent Poverty Rate]*[Single Parent Average Poverty Gap Ratio] POVERTY IN OLD AGE [Poverty Rate for Seniors]*[Average Poverty Gap Ratio]

INSECURITY (continued) WEIGHT RISKS BY POPULATION SHARE Unemployment – working age population Illness – All Single Parent Poverty - % population married + kids Old Age Poverty - % Population 45 to BASE YEAR Measures % changes relative to initial norm NOT YET INCLUDED: Insecurity due to unanticipated inflation, personal security, crime

Alternative Mechanisms for Adequacy & Security Some sense of assurance of future adequacy is basic to current economic well-being People will try to get it one way or another Personal Portfolio of social, market & public claims will change in response to market & policy changes Issue should be the Relative Social Cost of alternative mechanisms Not “How much does it cost ?” but “How do costs compare to those of the realistic alternative ?”

Alternative Mechanisms for Adequacy & Security (continued) Family/Kinship Ties Informal Community Transfers/Charity Corporate Welfarism Individual Market Choices Insurance/asset acquisition/portfolio choice Labour market mobility/training decisions Legal recourse Welfare State Transfer Programmes

Firms Voluntary – “Welfare Capitalism” Mandated Political Pressures for Private Sector Mandates increases if/when State withdraws Minimum wages/Wage awards “The Family Wage” Job Security Legislation – Severance and/or “Tenure” Mandated/Subsidized Fringe Benefits Health Insurance Retirement Pensions

Firms (continued) Problems/Research Issues Accurate Accounting for Tax Expenditures Costs/Benefits of Decentralized Delivery? Impact on Aggregate Demand for Labour? Impact on Labour Mobility? Aggregate Coverage of Population? Exposure to: Unilateral abrogation of “implicit contract” Bankruptcy risk Changing nature of firm – corporate shells

Organizational Change & Insecurity in 1990s “Delayering/Empowerment/TQM” Core/Periphery Strategy Demise of the “secure job” implicit contract Growth of non-standard “just in time” workers Increased use short-term contracts Increased part-time % Growth “self-employment” On-call/temp agency/contingent workers “Seller of Labour Services” or “Employee”??

Individual Action to achieve security ? Market Alternatives Private Insurance Asset Accumulation Cannot work for Youth or Repeat events Credit Need for Collateral implies unavailable for Poor Legal Recourse through Courts Very expensive & slow Workers Compensation came from employer pressures

Transfers within the Family & Local Community Research Issues: Actual Size and Pattern of Transfers Trends and Fragility Stress on family/community cohesion Impact of alternative transfers Equity Issues “Begging from Richer Relatives” & power, self respect issues within families In practice, there are substantial differentials by gender, age and status What happens to those who are left out? Efficiency and Behavioural Impacts The implicit taxation of successful relatives

Welfare State - Problems Social Protection and/or Poverty Alleviation Historically – income replacement for single earner household met both objectives simultaneously Now – multiple earner households the norm Crisis of Political Legitimacy/Trust Budget Politics and Slowing Growth Macro Policy Withdrawal

It’s imperfect, but is it worse than the realistic alternative ? Classic example - workers compensation An employer demand - to avoid costs of civil courts process for damages in workplace injury (Un)Employment Insurance Facilitates layoff/recall cyclical strategy for firms BUT in 1990s - expensive & blamed for high unemployment - drastically cut back in 1996 Unasked Questions: Is there a welfare gain to less insecurity ? What are the costs of alternative mechanisms to achieve individual security – to firms & workers ? Immobility implies keep seniority + family ties General skills less risky than specific

Sources of Insecurity in the 1990s High Unemployment Structural Change Globalization/Increased Trade Dependency Technological change – especially computer-based Organizational change

Public Policy Framework & Greater Insecurity End of Unemployment as Macro Goal Monetary policy – “price stability” Fiscal policy – deficit/debt reduction Reduction in Unemployment Benefits/Eligibility Cuts to Social Assistance Industrial Relations – in transition Trends in union density/ambiguity of union role End to Tariff Protection and Bail-outs

Is “Insecurity” = “Risk” ? “The anxiety produced by a lack of economic safety, - I.e. by an inability to obtain protection against subjectively significant potential losses” “Protection” strategies – is “safety” available ? Can individuals alter risk exposure ? Can individuals get “insurance” in case of loss ? “Subjectively significant” or objective probability? Habituation to old risk Sensitivization to experienced losses Excess salience of low probability events Risk or Insecurity => Creutzfeldt-Jakob Disease

Processing Probability Data – Systematic Biases “Individuals rescale probabilities, with more weight (proportionately) given to small probability events” – Kreps (1991) “Reference Dependence” “the carriers of value are gains and losses defined relative to a reference point” “Loss Aversion” “ losses loom larger than corresponding gains” “Diminishing Sensitivity” “marginal value decreases with size loss/gain” + Vividness, “Framing”, & anecdotal “evidence” Kahneman & Tversky (1991)

Research & Policy Challenges Objective Risk - the focus of both Public Policy & Academic Research Subjective Insecurity - what people care about Connected – challenge is to discern exactly how, & to what degree amenable to policy intervention