Human Capital Illiquidity: We’re All Ronins Now

So many jobs (automated), so little security. From clerks to machinists and now to lawyers, the pace of change is chewing up professions faster than ever. And that translates into a pace that clips the human capital investments as soon as they are finished but not paid off.  Megan McArdle offers a fine perspective on the legal profession’s sudden instability in a Bloomberg column:

Now the professionals are discovering what it feels like to bet your youth on something that may not pan out. These articles on the decline of the industries that absorbed decades of humanities graduates have a panicked tone. If an education doesn’t guarantee you a good job, what does? Are we living in a society in which all but the most ruthless go-getters will be economically insecure?

Well, probably. But welcome to the world most people live in — and have always lived in. Even in those halcyon days of the 1950s, union jobs were a minority of work; union membership peaked in 1954 at 28 percent of all employed people. Most people were in less stable jobs, working for small businesses, in domestic service, and so forth. Read Studs Terkel’s “Working” for a look at what employment in the 1960s was actually like, as opposed to what collective memory has airbrushed it into.

I wonder if human capital illiquidity is a rising, if not new, phenomenon. The idea of capital illiquidity (perhaps rigidity is a better phrase) was first introduced to me by Valerie Ramey based on her research with Matt Shapiro about displaced aerospace capital. A multi-million dollar aircraft cannot be re-allocated into some other physical form that is in demand such as, say, internet servers or even drone aircraft. As Ramey and Shapiro explain, “the more specialized the type of capital, the greater the discount.”

So an illiquid aircraft, or attorney, is suddenly only as valuable as its raw ingredients, whether that is steel & plastics or muscle & brains. If the churn rate in specialized capital is high and uncertain, then investments will be cautious and cash hoarding high. Is that optimal? Maybe we’re all ronins now.

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