Abstract

Economic insecurity: A microsimulation approach
Presenter: Matteo Richiardi (CeMPA, University of Essex)
Joint work with Patryk Bronka and Zhechun He. 

“I shall not today attempt further to define it, and perhaps I could never succeed in intelligibly doing so. But I know it when I see it.”

These were the words of US Supreme Court Justice Potter Stewart, describing his threshold test for obscenity in the Jacobellis v. Ohio case (1964).

Probably the same thing could be said of economic insecurity. This is everywhere in our life, in the media, it is perhaps one of the defining sentiments of our time - think of the gig economy, the debate on automation, the nostalgic views of a gold age when work was for life.

But how to measure economic insecurity, this is quite unclear. Many commentators relate economic insecurity to the uncertainty surrounding individual trajectories over time, associated to hazards like unemployment, illness, widowhood, disability and old age –the hazards identified in Clause 25 of the UN Universal Declaration of Human Rights (Osberg, 2015).

So, shall we treat economic insecurity as income volatility? This seems to fall quite off the intuitive understanding of the term. Elon Musk might experience high income volatility, but defining him as ‘economically insecure’ misses the point. Is economic insecurity related to social mobility? Yes, for sure, but social mobility typically compares income at two points in time. We probably have a more comprehensive view when we look at our future, considering not only the start and the end points, but possibly all the trajectory throughout.

The OECD provides an index of economic insecurity. This measures the expected cost of job loss, by looking at (i) the probability of becoming unemployed, (ii) the expected duration of unemployment, and (iii) the degree to which unemployment benefits compensate for lost earnings during unemployment. As such, the OECD index is unsatisfactory under many respects: it only looks at the short term, it is computed only on those employed, it considers only on a small number of individual profiles, it treats high earners and low earners alike, it disregards the risk of long-term unemployment, or the risks associated to changes in household characteristics, which affect the equivalised disposable income.

In this study we propose a radically different approach. We simulate life course trajectories, many times for each individual in the population, hence obtaining for each individual a distribution of possible outcomes, in terms of equivalised disposable household income. These are affected by what happens in the labour market, but also by other life course events, such as marriage, divorce, fertility, etc. We then summarise the uncertainty surrounding these hypothetical trajectories with a single number. Hence, our measure of economic insecurity is individual-based and forward looking, and allows us to identify the importance of the main barriers against economic insecurity, namely job security (how continuous is employment), wage security (how adequate is income in employment), and social security (how adequate is income when not in employment). Through the use of the EUROMOD tax-benefit calculator, embedded in a dynamic microsimulation framework, we can also identify the long-term impact of different policy instruments.

With this measure of economic insecurity in place, we are able to analyse how insecurity is related to a number of individual and societal outcomes, from health to postponed fertility, from home ownership to cultural attitudes and political outcomes. This has extensively been done for inequality, but so far very limited research exists on the determinants and the effects of economic insecurity, for lack of an appropriate analytical framework. We are providing such framework. And our guess is that, because insecurity is defined at an individual level while inequality only exists at a population level, economic insecurity might be of an even bigger social concern than inequality. After all, who cares about the Bill Gates in our society, when mortgage repayment is at risk?

Practical information

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