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Risk and the labor market: Societal past as economic prologue

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Risk and the labor market: Societal past as economic prologue

2
Risk
and
the
Labor Market
Societal
Past
as
Economic
Prologue
Sanford
M.
Jacoby
According
to
many pundits,
we
are living in a "high-risk society;' a kind
of
post-
modern
frontier
economy
(Mandel 1996). Workers are
being
advised
to
take care
of
themselves
and
their
kin
because
government, unions,
and
corporations are unwill-
ing
to
shoulder
as
much
risk as
in
the
past. Public programs
such
as Social Security
and
Medicare are
in
fiscal distress;
at
the
very least, it is unlikely
that
government
will assume
new
social risks,
such
as national
health
insurance. Meanwhile, unions
are a shrinking
portion
of
the
labor
force, representing less
than
9
percent
of
private-sector employees; few believe
that
they
will
soon
stage a major revival. And
corporations-on
whom
workers
once
counted
for stable
career
jobs
and
generous
"fringe"
benefits-insist
that
those
days are over
and
never
cOming back.
In
this "brave
new
world,"
the
savvy
postmodern
worker
is,
we
are told,
one
who
adapts
to
the
uncertainties
of
a globalized
and
downsized
economy
by
acquir-
ing multiple skill sets, saving
money
in
IRAs
and
portable, defined
contribution
plans,
and
maintaining a full
panoply
of
insurance policies. Personal responsibility
is
much
in vogue;
the
risk-sharing institutions
of
the
20th
century's "organizational
revolution" are in decline.
This
chapter
uses
the
concept
of
risk
to
examine
the
development
of
modern
labor-market institutions
and
to
assess
how
they
are changing in
the
present
period.
Although individuals face many kinds
of
risks,
among
the
most
immediate
and
pressing are
the
risks
attendant
upon
the
cessation
oflabor-market
income
due
to
layoff, sickness, accident, retirement,
or
death
of
a
wage
earner.
Over
the
last
one
hundred
years,
modern
societies have developed a diverse set
of
institutions for
pooling
labor-market
risks
and
indemnifying against them.
The
precise
mix
of
Sanford
M.
Jacoby
Anderson
School
of
Management, University
of
California, Los Angeles, Cali-
fornia 90095.
Sourcebook
of
Labor Markets: Evolving Structures
and
Processes,
edited
by
Ivar Berg
and
Arne
1.
Kalleberg. Kluwer
Academic/Plenum
Publishers,
New
York, 2001.
31
32
Sanford
M.
Jacoby
institutions varies over time
and
across nations, making this area a rich lode for
sociological mining.
Most studies
of
risk have
been
conducted
by
economists and,
more
recently,
by
cognitive psychologists. Individuals are said
to
possess "preferences" for differ-
ent
types
of
risks;
they
will
act
rationally
to
reduce
their
exposure
to
risk
through
tactics
such
as diversification
and
risk pooling (insurance). Despite
the
power
of
the
economic
approach
-
even
the
boundedly
rational version elaborated
by
Simon, Kahneman, Tversky,
and
others-there
are
important
issues
with
which
it
cannot
grapple. First
and
foremost is
the
question
of
how
individuals select risks
to
consider
and
their
willingness
to
accept
risk. Niklas Luhmann (1993),
one
of
the
few
sociologists
to
analyze risk, argues that
these
elemental decisions are
not
only
economic
and
psychological
but
also social. Think, for example,
of
the
cultural
and
class differences
in
the
perception
of
cigarette-smoking risk or,
to
cite examples
closer
to
the
concerns
of
this chapter,
how
perceptions
of
life insurance (Zelizer
1979)
and
job loss (Keyssar 1986) have
changed
over time.
Another
dimension
of
risk
in
which
social factors loom large is
the
process
by
which
individuals select
the
group
with
whom
to
pool
their
risk. This gets
at
questions
of
social identity
and
collective action
that
lie
at
the
heart
of
sociology.
As
Giddens (1990, 1991) has observed,
the
development
of
risk
and
risk sharing is
an
important
chapter
in
the
history
of
modernity,
part
of
the
movement
from gemein-
schaft
to
gesellschaft. From
the
18th
century
to
the
present,
one
can
see a shift from
personalized forms
of
risk sharing
to
more
anonymous systems
such
as commercial
insurance. Preindustrial risk sharing was
based
on
kinship
and
face-to-face relation-
ships,
rooted
in
trust.
The
rise
of
urban
industrial society in
the
19th
century
caused
a proliferation
of
more
impersonal
but
still mutualistic risk-sharing
groups
such
as
friendly societies, burial societies (especially
among
freed slaves), trade unions,
and
fraternal insurance groups. Toward
the
end
of
the
century, welfare capitalism en-
larged
the
"circle
of
'we'
" (Hollinger 1995)
to
include employees
of
a given enter-
prise. Finally, nations
witnessed
the
emergence
of
welfare states
that
extended
the
risk-sharing umbrella
to
all citizens.
While
the
welfare state
might
seem
the
epitome
of
a bureaucratic
and
im-
personal gesellschaft, its
creation
required
some
nontrivial
amount
of
social soli-
darity. More
than
most
insurance schemes,
the
welfare state entails redistribution
not
only
to
the
less affluent
but
also
to
veterans,
the
elderly,
and
other
groups.
Hence,
support
for social insurance has varied
over
time
as
individuals have
seen
themselves as
being
more
or
less a
part
of
the
national collectivity
with
whom
they
have cast
their
fate (Baldwin 1990).
The
most
modern
of
all forms
of
risk sharing
is
the
commercial insurance
purchased
by
atomistic individuals. Willingness
to
carry
such
insurance requires as
a
precondition
that
people
respect
the
expertise
of
actuaries
and
other
insurance
professionals and,
more
significantly,
that
they
place
their
trust
in anonymous
others
who
are
part
of
their
risk pool. Yet
the
relationship
to
these
others
is tenu-
ous;
neither
solidarity
nor
redistribution
characterizes
commercial
insurance
schemes.
The
economic
effect is
the
same as
that
achieved
by
the
extended
family
of
the
18th century,
but
the
social relations are completely different.
Sociological analysis has
an
advantage
over
more
individualistic methodologies
because
it recognizes
that
the
range
of
risk-sharing choices
open
to
individuals is
not
wide
but
rather
is constrained
by
the
set
of
risksharing institutions
that
exist
in
a given society
at
a given time. While individuals
can
form
new
risk-sharing
institutions,
the
collective action
problem
increases
the
probability
that
they
will
rely
on
sets
of
existing institutions. Individual
choice
models
usually
can
supply a
rational
explanation
for particular risk institutions. But
the
explanatory
models
are
ahistorical;
they
have little
to
say
about
why
some institutions
but
not
others
appear
on
the
menu
of
choices.
For example, economists
developed
implicit
contract
theory
in
the
1970s
to
"explain"
the
American
phenomenon
of
real wage insurance,
that
is,
wage
rigidity
combined
with
temporary
layoffs
and
unemployment
benefits. This
was
said
to
be
a form
of
insurance
that
reflected
the
relative risk preferences
of
workers
(risk-
averse)
and
employers (risk-neutral) (Azariadis 1975; Stiglitz 1987). Yet
the
theory
could
not
account
for
the
limited
incidence
and
scope
of
real wage insurance (e.g.,
cost-of-living escalators)
or of
income
replacement
for
workers
on
layoff (e.g.,
supplemental
unemployment
benefits).
Nor
could
it
account
for
the
substantial
variation
in
wage
rigidity over time (rising after
the
1930s
and
on
the
wane
in
recent
years)
and
across
space
(more
marked
in
the
United States
than
elsewhere). At best,
the
theory
asserted
that
these
phenomena
were
due
to
variations
in
risk prefer-
ences,
an
explanation
that
comes
perilously close
to
tautology.
On
the
other
hand,
a
more
sociological
approach
can
tell us
how
the
range
of
risk-sharing institutions is
generated; from this range
come
effective (as
opposed
to
notional) preferences. In
this sense, institutional arrangements
make
preferences
endogenous
Gacoby 1990).
Understanding risk requires analysis
of
the
actual
processes
that
generate inno-
vation
and
change
in
a society's risk-sharing institutions.
Once
a particular constella-
tion
of
risk institutions establishes itself,
the
likelihood
of
other
institutional
options
is
reduced
(e.g.,
the
early
development
of
a welfare state in Scandinavia
made
it
harder
for private insurance
companies
to
establish themselves,
whereas
in
the
United States,
the
early
development
of
private insurance constrained
the
expan-
siveness
of
the
welfare state). Economic historians
term
this
phenomenon
path
dependence (Arthur 1994; David 1985). This
mode
of
reasoning is
not
unknown
to
sociology. Sociologists have long
paid
attention
to
the
constraints
of
institutional
sequencing
(Bendix 1964) and,
more
recently,
to
the
role played
by
"organizational
fields" (Fligstein 1990).
In
what
follows, I trace
the
rise
of
modern
institutions for sharing labor-market
risk.
The
analysis first
shows
the
play
between
economic
and
social factors
in
the
rise
of
U.S.
risk-sharing institutions
and
then
it demonstrates
how
differences in
initial conditions
produced
disparate
outcomes
in
Europe
and
the
United States.
In
the
United States, a
weak
state, an individualistic ethos,
and
social heterogeneity
combined
to
produce
a
set
of
institutions
that
put
the
weight
of
risk-sharing
on
private parties
rather
than
government. Even after
the
emergence
of
a welfare state
in
the
1930s, private institutions played a significant role in risk mitigation,
more
so
than
in Europe.
The
chapter
then
shifts
to
the
contemporary
dual crises
of
wel-
fare capitalism
and
the
welfare state,
brought
on
by
economic
globalization
and
demographic
shifts.
In
Europe,
the
response
has
been
various
attempts
to
shore
up
the
welfare state; in
the
United States,
there
is greater interest in privatization
of
risk-sharing arrangements.
The
chapter's
intent
is
to
provide a
more
sociological understanding
of
the
contemporary
labor-market
situation in
the
United States. But it also has a meth-
odological objective, namely,
to
demonstrate
the
value
of
a sociological (compara-
33
Risk
and
the
Labor
Market
34
Sanford
M.
Jacoby
tive
and
historical)
approach
to
analyzing
labor-market
risk. Economic sociology
faces stiff
competition
from
the
neoclassical
economic
approach
to
industrial
and
financial markets. But it
can-and
has-made
significant
contributions
to
the
analysis
of
that
most
peculiar
and
noncommodified
sector
of
the
economy:
the
labor
market.
MUTUALISM
The
concept
of
risk is quintessentially
modern
because
it requires a
modern
sense
of
time
to
make a clear distinction
between
past
and
present.
Not until
the
17th
century
did Western societies possess
the
armamentarium
of
strict time
measurement,
such
as schedules, clocks,
and
calendars (Zerubavel 1981). Risk
analysis also required
the
development
of
the
mathematics
of
probability,
which
allows us
to
conceive
the
future as humanly
created
or
humanly controlled "risk"
rather
than
as Providential
danger
(Luhmann
1993; Knight 1921).
As
Giddens
(1991:111) remarks, "The
notion
of
risk
becomes
central
in
a society
which
is taking
leave
of
its past."
Prior
to
the
19th century, formal institutions for
pooling
labor-market
risk
were
relatively
uncommon.
While
one
could
obtain fire
and
marine insurance,
these
products
were
purchased
primarily
by
wealthy businessmen.
The
bulk
of
the
American
population
remained tied
to
an
agricultural
economy
organized
around
the
family unit. Sons
accepted
the
responsibilities
of
caring for elderly parents.
Those sons
who
became
economically
independent
of
their
parents"
still
continued
to
live in a
community
in
which
their
parents, siblings, grandparents, uncles
and
aunts,
and
cousins also lived,
thereby
involving
them
constantly
with
people
who
were
related
to
them
by
birth
and
marriage" (Greven 1970:138). In maritime
New
England, fishing families
headed
by
men
past
the
age
of
40
depended
heavily
on
the
earnings
of
teenage sons (Vickers 1994).
These
kinship
networks
provided aid
in
times
of
accident, sickness,
or
death. Local communities also
pitched
in
to
assist
bereaved
widows
and children.
In
addition
to
pooling risks
with
family
and
neighbors,
another
strategy
to
protect
against risk
was
diversification
of
income. Farmers
and
their
wives often
took
up
some light manufacturing,
either
at
home
or
as seasonal employment.
The
same strategy
was
pursued
by
those
who
took
jobs in
the
factories
that
began
opening
up
in
the
1820s
and
1830s. During
those
years, factory
workers
in Lynn,
Massachusetts,
supplemented
their
seasonal manufacturing
wages
by
turning
to
livestock, gardening,
and
fishing (Keyssar 1986). A different diversification strategy
was
to
possess a multiplicity
of
skills,
to
be
a "well-rounded" craftsmen. Such
versatility
made
a
worker
attractive
to
a large
number
of
employers, while simul-
taneously offering some
protection
against technological
change
that
might
render
one's
narrow
skill-but
not
an
entire
ensemble-obsolete
(Gutman
1976; Jacoby
1985).
As
industrialization
and
urbanization
proceeded
during
the
19th century, peo-
ple
began moving in ever-larger
numbers
from rural
to
urban
areas
of
the
United
States. Starting in
the
1840s,
the
workforce
was
expanded
by
immigrants from
the
British Isles, Germany,
and
then,
in
the
1880s, from Eastern
and
Southern Europe.
These changes forced millions
of
formerly rural
people
to
seek
new
ways
of
dealing
with
the
uncertainties
of
modern
life. City-dwelling
workers
could
no
longer rely
on
homegrown
food
to
get
them
through
a spell
of
joblessness.
The
elderly,
who
were
an
important
part
of
rural family life, found industrial firms
reluctant
to
employ
persons
past
their
prime. Young,
unmarried
women
began
to
work
outside
the
home,
raising parental
concern
for
their
morals. Meanwhile, dangerous factories
and
crowded
cities
brought
on
occupational injuries
and
other
health
problems.
For
much
of
the
late 19th
and
early
20th
centuries,
the
family
was
the
first line
of
defense for
urban
wage earners. Families
adopted
a "defensive"
mode
of
eco-
nomic
cooperation, pooling
their
incomes, sharing homes,
and
hoarding resources
for rainy days
brought
on
by
illness. Death
of
a
man