- Digital forces are reshaping how people earn a living, creating a higher level of income variability.
- The future of work demands new earnings securitization partnerships to ensure income predictability.
- Societies must rethink unemployment benefits to smooth income shocks and incorporate the freelance workforce.
Our stable world of full-time employment and steady occupations is being upended by digital change. Artificial intelligence (AI) and robotics technologies are gradually automating tasks in occupations ranging from factory work and retail checkout to customer service and long-haul trucking. Across retail, transportation, media and education, AI and digital platforms are creating new business models that rely on a very different mix of human and machine labor, and a reimagined blend of in-house and on-demand talent. The embrace of platform strategies in large corporations will further chip away at the dominance of full-time employment, spawning an array of micro-entrepreneurship, freelancing and part-time gig work arrangements.
Over the second half of the 20th century, the workforce became accustomed to being paid a weekly or monthly wage in exchange for their labor and talent, and the full-time employer took on the key societal role of ensuring income stability and predictability for the population. This allowed families to easily plan their daily consumption and spending, and make long-term investments in a home mortgage or college fund more readily.
The non-employment work arrangements that will be increasingly prevalent in the future have a decidedly different income profile. My ongoing research finds that while today's self-employed U.S. workers tend to be high earners, they are also far more likely than their full-time employed brethren to experience big swings and dips in their monthly or annual income levels. For example, between 2003 and 2015, more than half of self-employed U.S. workers withstood both an increase and a decrease of at least 50% in their annual earnings, compared to about a quarter of full-time employees.
In the coming future of work, income variability will become a stable state. Our government and financial intermediaries must step in to fill the void. The U.S. financial services sector has pioneered a range of creative approaches for smoothing out volatility and managing risk. What is needed for tomorrow's workforce is a collaboration that gives workers with short-term earnings variability a new set of options for predictability and stability.
In the past, the corporation ended up being the natural entity to pool the time-varying labor and talent contributions of a group of workers — their employees — and offer them steady income streams in exchange. As the full-time employer fades into the background, there is no reason why large financial institutions cannot provide the same sort of insurance as a product for a freelance workforce.
For example, over a period of time, an individual could contribute a small fraction of their earnings as a "premium," with a government incentive to seek out this stability akin to the tax breaks provided for 401(K) contributions. The insurer could then, over time, guarantee a minimum monthly income level for the individual. Of course, the usual challenges of moral hazard and adverse selection will need to be addressed, but there is no reason to believe that the data science whizzes of Wall Street are not up to this challenge.
While addressing short-term income variability, attention must also be paid to the impending increase in larger shocks to individual earnings. A recent study by the World Economic Forum projects that over half the global workforce will require significant reskilling and upskilling in the next few years. Mind you, we aren't talking about people simply shifting companies to do the same job somewhere else. Rather, the typical worker will have to take a few months to a year to retrain themselves, and then find an entirely new occupation.
While the U.S. has unemployment benefits that fund this kind of longer-term income gap, it is designed with the assumption of "employment" as the steady state, and often out of the reach of workers that have non-traditional work arrangements. We must update it to recognize that qualifying for benefits should not rest on tests of prior full-time employment or seeking a job, but are expanded to people pursuing alternative work arrangements, who will eventually be a majority of the economy.
The next two decades will see an upheaval of the workforce on a scale and at a pace we have not witnessed in the past. Growing income instability can sow social unrest and political backlash. The United States must look past utopian proposals like a universal basic income, and instead play to our strengths, creating new individual-institution government partnerships that leverage our culture of innovation and our deep expertise in finance. The transition is still in its infancy, and the time to act is now.
—By Arun Sundararajan is the Harold Price Professor of Entrepreneurship and Technology at NYU's Stern School of Business and author of the award-winning book "The Sharing Economy."
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.