Wednesday, August 28, 2013

Perceiving Job Insecurity


study in the Journal of Occupational & Environmental Medicine finds evidence linking perceived job insecurity in the Great Recession to poor health outcomes, even among workers who remain employed. The authors, Sarah Burgard, Lucie Kalousova, and Kristin Seefeldt, find that insecure workers--those that believe they are at risk of being laid off--are more likely to report poor self-rated health, symptoms of depression, and anxiety attacks. Sad, but not hugely surprising.

I originally intended to point to this study as yet more evidence of the harmful consequences of prolonged high unemployment. I intended, in particular, to write about how the anxiety and poor health consequences associated with the fear of losing a job must fall especially hard on people with low income. So I set out to gather a bit more data to back up that particular hypothesis, imagining it would be quick and simple task. Not quite.

Most of us are pretty aware of the unemployment rate in the U.S.--7.4% as of July 2013. But for people who do have a job, the more relevant statistic for their financial decision-making (and apparently also for their health) is the probability that they (and members of their household) will keep their job. This statistic is much harder to come by. How aware are workers of their risk of being laid off? How do you quantify job security?

The first place I looked was the Bureau of Labor Statistics, which provides data on layoffs and discharges. The monthly layoff and discharge rate for total nonfarm employment is around 1.3%. It peaked at 2% in early 2009 (see graph below). If we all believed we had a 1 or 2% chance of being laid off, we probably wouldn't be too stressed out about it. But the layoff and discharge rate does not directly translate into an individual worker's probability of losing a job, and it definitely does not translate into a worker's perceived probability of losing a job (the statistic most relevant for their health).



How can we get at people's perceived job insecurity? One way is to ask them. The Michigan Survey of Consumers asks survey participants, "During the next 5 years, what do you think the chances are that you (or your husband/wife) will lose a job that you wanted to keep?"

Broken down by income tercile, here is a graph of the mean responses. What initially surprised me the most is that the lowest income tercile has the lowest perceived job insecurity. In 2012, on average, people in the lowest income tercile reported a 17% chance of job loss, while people in the middle and upper terciles reported 19% and 20% chances, respectively.

Mean perceived chance of job loss by respondent or partner in next 5 years, by income tercile. Source: Carola Binder with data from Michigan Survey of Consumers. Moving-average filtered.
When you look at the distribution of responses, however, it becomes clear that you have to interpret the mean with a large grain of salt. Respondents are allowed to say any number from 0% to 100%. But they mostly just say one of two numbers: 0% or 50%. This is a common tendency across income levels, but especially among the lowest income tercile. In 2012, around 70% of respondents in the lowest income tercile chose 0% or 50% as their response. In the middle and upper income terciles, 58% and 47% of respondents chose those responses.

Percent of respondents who say that their chance of job loss in next 5 years is either 0% or 50%, by income tercile. Source: Carola Binder with data from Michigan Survey of Consumers. Moving-average filtered.
Prior to answering the question, survey takers are given this brief intro to help them understand probabilities: "Your answers can range from zero to one hundred, where zero means there is absolutely no chance, and one hundred means that it is absolutely certain. For example, when weather forecasters report the chance of rain, a number like 20 percent means 'a small chance', a number around 50 percent means 'a pretty even chance,' and a number like 80 percent means 'a very good chance.'" Nonetheless, most people seem to have tremendous difficulty quantifying their probability of job loss. Over half of people choose 0% or 50% as their response.

Whether or not you will lose your job can be represented by a bernoulli random variable. A bernoulli random variable is summarized by its mean (p). The Principle of Insufficient Reason, or Principle of Indifferencesays that "if we are ignorant of the ways an event can occur (and therefore have no reason to believe that one way will occur preferentially compared to another), the event will occur equally likely in any way." This principle was discussed by Bernoulli, Laplace, and Poincare, among others. For a bernoulli variable, this principle says that if we are totally ignorant about its mean, our prior is that the mean is 0.5. This has a corresponding result in information theory: the entropy of a bernoulli distribution is maximized when p=0.5 (think of a 50% chance as being the "most uncertain.") If we have absolutely no information about how likely we are to lose our job, we might just guess that we have a 50% chance of losing it.

Keynes himself summarized the Principle of Indifference in his 1921 Treatise on Probability as follows:
"if there is no known reason for predicating of our subject one rather than another of several alternatives, then relatively to such knowledge the assertions of each of these alternatives have an equal probability" (pg. 52-53).
Keynes was one of many to critique this principle. His views on probability and uncertainty remain controversial, as does the Principle of Insufficient Reason. There is actually quite a large body of literature in statistics concerning "noninformative priors" that continues to study the fascinating and controversial issue of how to represent ignorance. There are also subfields of behavioral economics that study how people treat probability, particularly when it comes to low-probability events (like job loss, usually).

This post doesn't have a real conclusion, just some open questions. What do people do when they don't know their chances of having a job in the future? Do people "underplan" or "overplan" for the possibility of job loss? Would people be better off in general if they could estimate their probability of job loss more precisely? How would you readers estimate your own probability of losing a job in the next 5 years?

32 comments:

  1. Preserve12:05 AM

    A popular management tactic in the great recession was for managers to drive healthy/happy workers till they displayed adverse health effects.

    As we all know, once people pretend to be sick.. they become sick.

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  2. Anonymous12:20 AM

    I graduated from university during the recession. I had been working since high school, so I had no problem maintaining employment. However, I was completely unsuccessful in finding a better job, the main reason I went to university in the first place.

    Years later I found a good job, although it is not in my field of study. The period in between graduating and becoming comfortable in my current job was very stressful. I had very little money in the bank, and I worried that any emergency would clean me out. I worried that I was not making progress towards reaching my financial and personal goals in life. I worried that my desirability as as a potential employee was diminishing with every passing day.

    As soon as I got my current job I knew that I wanted to have financial security. I didn't want to have to worry about losing my job. In the last 3 years and I've saved more than a years gross pay. My car has 210,000 miles, my computer monitor is from the 90's. I own three pieces of furniture: a desk, a chair, and bed.

    Yesterday I heard rumors that some people in my job were going to be made redundant. I haven't spent a moment worrying about being laid off. I have been thinking about doing something I haven't done in 3 years, taking a vacation.

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    1. Anonymous11:13 AM

      Congratulations, asshole. Your point is what?

      Delete
    2. Anonymous1:12 PM

      I never imagined I would be called an asshole for sharing my story. The point is I know how stressful it is to be in a poor economic position. Now that I'm not, I've decided that the only way to eliminate that stress from my life to have plenty of savings. I've also decided that I'm willing to forego increasing my standard of living in order to have those savings.

      Secondly, my views have been shaped by where I've worked. I've never worked for an employer that put the interests of their employees ahead of the business' financial performance. My experience has been that if demand slackens, hours will be cut, wages might be cut too. If the employer thinks they can make more money by outsourcing Job XYZ, it will be outsourced. If the employer thinks they can eliminate overhead by consolidating operations, they will be consolidated etc... I think people are completely naive to think that there is anything they can do that guarantees their ongoing employment.

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    3. Anonymous3:17 PM

      Forgive anon at 11:13am. Siri was inadvertently transcribing while the dude was looking in the mirror.

      Delete
  3. the odds losing one's job is roughly inversely proportional to your earnings. So biggest earnings = smallest probability. How to translate this into a percentage? I dunno Once the last bit of water has been squeezed from the stone of productivity, eventually employers are left with no choice but to hire.

    " What do people do when they don't know their chances of having a job in the future?"

    They are more productive and anxious I suppose.

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    1. In response to Institute saying maybe people are more productive and anxious, I'd say they're probably more "active and anxious" - whether activity translates into productivity is an entirely different question.

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    2. It also may mean (for some people not all), that they are more likely to withhold information, or criticise other people because they see their co-workers as competitors. It must tend to make the workplace less co-operative.

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  4. Anonymous' comment strikes the tone that I had when reading this piece.

    Job insecurity is one angle, but I think the bigger problem in this second Gilded Age we live in is job QUALITY. People with university degrees are scrambling for the few decent office jobs that this economy is creating. And many are resigning themselves to drug/alcohol abuse or lower class jobs that are well below their potential.

    Even if someone gets a job out of their field, they should be earning a living wage. What's the point of having job security if your job is just a crappy low-wage gig? Wages have been stagnant and diverting from productivity-adjusted levels since the 70's. This is the real problem, not job insecurity.

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  5. I'm not sure if people actually think this way, but the chance of getting a job if you lose your job is probably as important as the chance of losing your job in the first place. I'd guess that's what goes down in a recession.

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  6. Phil Koop8:06 AM

    OK, if I am completely clueless about the probability of job loss, then entropy explains the choice of 50%. But what about 0%? How can anyone, even if self-employed, be 100% confident of continued employment for five years?

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    1. Anonymous3:19 PM

      Because people are over and over and over again over-confident about their ability to predict future events. People are predictably irrational.

      Delete
  7. A wonderful post, Carola, and relevant to thinking about the precautionary principle too, if (like me) you think it's at least partly about how ignorance should enter into decision heuristics. One approach that survey-writers could take is to adopt a version of the chain strategy: ask people to compare the likelihood of their losing their job to some hypothetical benchmark. Directly or indirectly, by calibrating that benchmark we are getting somewhere.

    That said, anxiety about losing your job is not the same as the probability of it, since it depends on other factors, like how well you'll manage if you do get canned. Presumably, for any given subjective probability of being laid off, lower income people have cause to be more anxious.

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  8. This is interesting. It seems what you are trying to get at is anxiety. Why not just use the change in perception and forget about the level. The level is apparently wrong in any case as the actual probability of losing a job is so low, such high estimates for the probability of job loss may be driving the anxiety which apparently stems from a cognitive/behavioral bias presumably anxiety levels increase with an increase in the bias.

    Its not clear if the bias actually lags actual increases in probability or if it is simply lags in reporting and measuring of the bias, but it may be just as useful to use change in actual layoff rates as presumably awareness of this change drives the bias and the anxiety.

    And Peter, perhaps higher income people have higher anxiety due to social stigma and higher difficulty in replacing similar salary, and higher financial obligations?

    ReplyDelete
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    1. "The level is apparently wrong in any case as the actual probability of losing a job is so low ..."
      No its not.

      Read again 1-2% per month i.e. 12-25% per year and they were asked for the probability over 5 years. So the answers don't look obviously way off.

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    2. great, so I was dramatically wrong, I should be fired. Apparently people underestimate the odds of getting discharged.

      So if people are getting fired at such high rates apparently the source of anxiety should be about the ease of finding a job once fired. Perhaps a proxy for this is the rate of voluntary quits - assuming people quit on their own at higher rates when the general view is its easier to find another job.

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    3. In fact most people quitting voluntarily ALREADY have another job.

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  9. Damn, I don't know what the photo is on this post, but it's giving me the willies!! :-)

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    1. When I cursor over it, it says "spinning penny" which seems plausible with the right lighting and a reflective table.

      On the main question: I wonder if they factored out people who expected to leave their jobs through failing health or retirement? For myself (age 59), the chances are probably over 80% that either health problems or retirement will take me from my current job within five years.

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    2. Phil Koop12:36 PM

      Oh I see. Maybe that's were 0% comes from - retirement isn't "losing a job you want to keep."

      Need more coffee.

      Delete
    3. Anonymous1:42 PM

      Noah you are far to busy to be commenting on silly little blogs, please return to more productive and important matters.

      Oh and I'm totally not holding it against you that you abandoned us loyal readers.

      By the way I have been really enjoying your temporary Noahpinioners. Kudos to them for the high quality blogging. I hope you know you are quite lucky to have such talent to rely on, or are you so haughty now that just the priveledge of blogging in your space is reward enough? Methinks not.

      Delete
    4. Phil, I checked by age groups, and it's true that the oldest people are most likely to say 0%, which could well be that they plan to retire soon. But even among 18-35 year olds, over 20% say they have a 0% chance.

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    5. Me too, Noah. I know it's supposed to be a spinning penny but to me it also looks like a person with their head down....real picture of depression.

      Delete
  10. Carola - the study is gated, but do they break out the magnitude of the job-insecurity effect by income strata? Would be interesting to see if the same issues you cite in the Michigan Survey are at play.

    Agree with the other comments about being careful we don't conflate perceived probability of job loss with concern about job loss. On average, a bottom tercile worker is going to be more adversely affected by job loss. Maybe bottom tercile workers are less realistic about their chances of being laid off over a 5 year time horizon because they're more focused on near-term problems and concerns then are top tercile workers? Not sure...

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    1. Here is a link to an ungated version:
      http://www.psc.isr.umich.edu/pubs/pdf/rr12-750.pdf

      See Table 1, near the bottom of the table they break down insecurity by "income-to-needs" ratio and get approximately the same number by high and low income-to-needs ratio. Here's their description of that ratio:

      "We also include a measure of the household’s income-to-needs
      ratio in 2008 (income divided by the federal poverty line for that household size). We dichotomized the distribution to separate those with ratios of less than one – generally categorized as “poor” – or from one to two – considered “near poor” – from those with ratios of two or more."

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  11. I wonder about how well that question generalizes across income brackets. "A job you want to keep" might mean very different things depending on one's circumstances, employment options, and other factors, so comparing tercile to tercile is rife with measurement problems.

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  12. I'd have to dig it up, but I'm pretty sure no one understands probability. I have a journal article pinned to my office wall that has quote is a perfect illustration: "Very rarely does anyone warn students in low-level remedial courses that the math sequence only has a 17 percent success rate."

    I love that sentence because of the irony -- even if explained, remedial students don't get the 17%. Heck, most non remedial people won't understand this.

    For example, if, after five years, you have kept your job, what was your probability of losing it if you wanted it?

    I'd bet that a lot of people would have a zero percent chance.

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  15. A psychological issue that I suspect is big part of the perceived job security picture: How well can someone handle a job loss? If the answer is "not a serious problem, maybe take a couple of weeks off", then the job will be perceived as more secure than if the answer is "I lose my house in 2 months, and will never be able to work again."

    When unemployment is low, especially in a particular field, the risks of being unemployed are also low, and so the perceived job security will be higher, and vice versa. Also, when someone has low personal debt and/or significant savings, I suspect there will also be a higher perceived job security.

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  16. Anonymous9:09 AM

    Asking people to estimate their probability of job loss is a recipe for mass confusion.

    What's my probability of job loss? I'm studied math a uni, specicalizing in probability, and I have no idea. I'd say about 5%. But I just pulled that number of my ass.

    I would think it would be informative to ask the question with 3 options:
    Likely
    Unlikely
    Very unlikely

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  17. Indeed Carola, Keynes's views on probability are somewhat discussed in the secondary source literature. However, from that literature, here is a more recent scholarly publication that looks quite promising and may very well have heavy implications...

    http://www.torrossa.it/resources/an/2569189

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