by Mike Orszag, TowersWatson
Some of the key questions people must ask themselves when planning for retirement include how long they can continue to work, how much they can earn, and whether they can count on their job still being around. In this day and age, these worries are compounded by a concern that older individuals could be ‘forced out’ by the younger generation. That is, even if someone is not ready to retire, he or she might feel pressured to leave “to give the young folks a chance.”
This perspective arises from a belief that there are only so many jobs than can be filled in the economy – the so-called “Lump of Labor” view. In fact few arguments irritate mainstream economists more, as history has shown that there’s not a fixed demand for a set lump of labor. Instead, over our history, when labor supply has changed, wages adjusted and the economy grew.
A related argument is that people’s skills become obsolete over time, so technological change dooms us to ever-higher un- and under-employment. Certainly technological change has forced re-invention of the workplace time and again, so it’s critical to invest in one’s knowledge to avoid job loss. But the productivity improvements flowing from new technology do not lead to aggregate job loss; rather they produce job evolution. Of course the adjustments can take a long time and may be painful for some, but a more productive economy will float many boats.
Nevertheless, there’s good reason to worry that the lump of labor ‘fallacy’ may now be more right than wrong, due to the changing nature of skill revolution. In the old days, there were always some jobs that unskilled workers could take, but this may not be true in the future. For instance, during the industrial revolution, machines took the place of many simple and repetitive tasks. Yet there were plenty of other jobs where people were more productive than machines. Additionally, new jobs appeared that had not been anticipated previously, as a result of the new technologies.
What seems different today is that machines are now growing smarter than people. What this implies is that the range of alternative jobs which people can do better will shrink. This could make labor market adjustment more painful and longer for the individuals involved.
The reality that our human capital is increasingly risky is rarely acknowledged by financial advisers and pension sponsors. Yet most people are unable to accurately estimate how likely it is that their own skills will be relevant a decade or two hence. Nevertheless, the nature of technological change should make human capital risk more important for those looking ahead and planning for retirement. Not only is obsolescence a bigger risk, but mitigation steps are far less clear.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania