Income & Employment Risk

I happen to be lucky enough to have secured a full-time job after graduation, so I’ll be thinking about the topic of reducing income risk retrospectively.

I’m in a major (actuarial science) that trains students for one specific career path (being an actuary). As a result, there’s a defined set of actions students can take to make themselves more attractive to employers when they’re looking for full-time employment. There are some things that students can do that relate to academia that make them more eligible candidates – getting good grades, passing actuarial exams, adding another major or minor, and taking coursework that relates to the skills used on the job. There are also things students can do that don’t relate to academia – taking leadership positions in organizations, working actuarial internships during the summers (and if you’re lucky, during the school year), and developing interpersonal skills. In addition, if a student is interested in working for a particular company, it helps to get to know the recruiters for that company through attending the presentations they do on campus and through talking to them at our annual career fair.

I’ve been working toward getting a full-time job since my freshman year. I went to all but 2 of the many company presentations offered during my first semester, and started my first actuarial internship at the start of my second semester. Throughout my time here I’ve continued to attend presentations and talk to recruiters at companies, even if I wasn’t interested in them at the time. I’ve also worked to pass actuarial exams and keep my grades up, as well as adding majors and minors. All of this effort was at the expense of free time, meaning that I chose to do something that would help my future career over something that seemed like a better option in the moment. So, I was very risk-averse with regards to my future employment.

I would like to note, however, that my main motivation wasn’t reducing income risk, but reducing job satisfaction risk. Actuaries overall are well-paid, so my main goal was to ensure that when I got to the point of looking for full-time employment, I would be able to work in the position that I would enjoy the most – not necessarily the one that paid the most. My perception of what I would enjoy the most changed over the course of my education here, so I was very glad that I’d talked to companies during my freshman and sophomore years that I wasn’t interested at the time but became interested in later.

Most people do not use my strategy, and for good reason – it’s incredibly time consuming and most people strive for more work-life balance than I do. For these people, there are some times where doing something they want to do now is worth more than doing something that might or might not help them in the future. The outcomes are varied – some are able to secure a full time job without a problem, and some graduate without finding employment in the actuarial field. From what I’ve observed, though, the more effort someone puts in and the longer they’re actively improving their qualifications, the better chance they have of being where they want to be after graduation.

From this, we could infer that the more risk-averse a person is with respect to their future employment, the more they would actively participate in recruiting activities and improve their skills. If a person was alright with taking on more risk (or if it wasn’t a top priority), they would spend less time working to make themselves as employable as possible. I happen to be very risk-averse, but different approaches are appropriate for people with different preferences.

Opportunism

                It’s rare that an executive team that has a lot of influence is largely unregulated, but that’s the case with the Actuarial Science Club. There’s a group of 10 students that plans and runs just about everything that the students participate in outside of class – recruiting season, social events, and networking opportunities to name a few. There’s a faculty member who is technically our sponsor, but he’s very hands off. As a result, there are quite a few opportunities for students to take advantage of circumstances where they have a great deal of power and low chance of repercussions.

               The most obvious opportunity here would be in the money collection process. We collect fees from our club members for numerous things over the course of the year – club dues, fees for events, and club merchandise just to name a few. Because there are 10 of us collecting money from so many people, it would be easy for someone to take the club’s money instead of depositing it. It would also be easy for someone to give their friend a “free pass” by marking down that they’d paid when they hadn’t.

               While I haven’t vetted every single board member, I do know that there are board members who haven’t taken money from the club or given their friends a “free pass”. The person I’m thinking about specifically is or president from the 2012-2013 school year, Jenna. She didn’t take advantage of this opportunity when she held a more junior position in the year prior to her presidency, either. I’d speculate that she didn’t take advantage of the opportunity for multiple reasons. First and foremost, I think, she considered the concept of stealing to be morally wrong. She always tried to uphold a high moral standard, so the thought of stealing from the club would have been completely out of the realm of possibility. I think another reason that she didn’t steal is that she genuinely cared about the club. She personally had benefited from the club quite a bit, so she wouldn’t want to take any resources that would be put toward benefiting others. My last guess would be that she wouldn’t want to take the risk of getting caught and ruining her reputation. The actuarial field is very small, so one amoral act can permanently damage your reputation and have an effect on your career.

               On a very large scale, these do amount to the same thing – she didn’t want to do something that would result in a negative outcome for her. The nature of those negative outcomes are different, though. In the cases where she didn’t want to commit an amoral act and where she wouldn’t want to take resources from a club she cared about, the negative outcome would be a personal feeling of regret. In the case where she didn’t want to ruin her reputation, the negative outcome would be an impact on her dealings with other people and potentially her future earnings. The first is internal, the second is external. Either way, though, I’m glad she made the decision she did to stay honest and not take the opportunity presented to her.

               

Transaction costs within RSOs

I’ve been on the executive board of an RSO on campus since my sophomore year. There are 10 spots on the board, and each academic year people apply for specific roles on the board. Because students who have been on the board before generally apply for higher positions than they held the previous year, there are new students coming into each role every year. While the returning board members are always willing to offer advice to new board members, the change incurs a sort of transaction cost on a yearly basis – the cost of the time and resources spent getting up to speed on the requirements of the new positions, and for the new board members of just teaching them how the board works on a basic level. This process improves every year, but there’s still a long way to go.

The executive board itself consists of 10 people with defined jobs. In addition to those defined jobs, each board member is required to attend weekly board meetings and spend at least 2 hours in our club’s cubicle in the RSO Complex. Most board members also devote additional time and resources to the RSO through coming to events, helping other board members with responsibilities, and sometimes spending their own money to achieve an objective of the organization. I consider this additional effort to be a transaction cost – it’s a necessary part of being on the board that doesn’t serve any direct goals or provide any direct benefits.

I would argue, though, that these additional costs are largely outweighed by the benefits. As this RSO is a major-specific organization, holding a position on the executive board is a huge asset on a resume for any internship or full time job in the field. And if a board member builds a reputation for helping others and making sure that things run smoothly even if they have to make a personal sacrifice to do it, other board members will develop a respect for the person and be more willing to help them with whatever they’re working on. The general members develop respect for board members as well, which is powerful networking that can help later down the line. Our profession is very small, so developing a good reputation early is incredibly useful.

Response 1 - Milton Friedman Bio Sketch

Milton Friedman was a prominent economist in the mid-to late 1900’s. He was born in New York City in 1912, and went on to get degrees from Rutgers University (BA), University of Chicago (MA), and Columbia University (Ph.D.). He won numerous awards throughout his lifetime, including the John Bates Clark Medal and the Nobel Prize in economics. He held many prestigious positions, including an advising position in the Nixon administration, a research fellowship at Hoover Institution at Stanford University, as well as a professorship at the University of Chicago.

While he held numerous positions at universities and in the government, his theories in economics actually go against many of the established economic theories of his time. In one of his books, A Theory of the Consumption Function, he disputes the classical consumption function. Instead of the classical assumption that household income reflects current income, Friedman argues that households actually operate using an assumption of what average income will be over the next few years. In another of his books, Monetary History of the United States, he essentially claims that the Great Depression is the Federal Reserve’s fault. His argument is that if the Federal Reserve increased money supply in tandem with GNP, then inflation wouldn’t exist. The Federal Reserve got so angry that they stopped releasing minutes from their board meetings, and commissioned another book to be written in retaliation. Friedman continued to voice his opinions and argue economic policy until his death in November of 2006.

Friedman’s views were not only controversial but also influential. In 1962 he published Capitalism and Freedom, which made a case for relatively free markets. He argued for a volunteer army, freely floating exchange rates, and the abolition of licensing doctors, among other against-the-grain ideas. This book was so influential that it inspired young minds to study economics when they otherwise wouldn’t have. About 20 years later, he and his wife published a book together, Free to Choose, which went along with a TV series on PBS. The book and the series helped to spread Friedman’s ideas and make him a household name. In addition to the general public, Friedman also had an influence on other economists of the day. His work influenced the opinion conveyed in a prominent economics textbook, Economics, with regards to the long-run effect of the trade-off of unemployment and inflation.

It is because Friedman was so influential that his work is important. Friedman and the people whose thinking he shaped played a large part in abolishing the draft, bringing down Communism, and helping deal with stagflation in the 1970’s. While there are still many economic policies in place today that are indirect opposition to Friedman’s viewpoint (e. g. farm subsidies, high taxes, etc.) the world is much more free-market-focused than it would have been without Friedman’s influence.

While organizations don’t necessarily deal with the macroeconomic issues of unemployment and inflation, they do deal somewhat with markets. Although Friedman advocates for free markets that don’t really exist in a hierarchical organization, it’s important to at least view the issue from both sides. While I hadn’t heard of Milton Friedman before this class, my thinking (and obviously many others’) has certainly been shaped by his work.

Sources:
Library of Economics and Liberty Encyclopedia
The Economist - "Unfinished business"
The Economist - "A heavyweight champ, at five foot two"

Picture: Nobel Prizes and Laureates biography

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