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Life is filled with risks, and most of them skew to the downside: losing a job or getting hit by a car is much likelier than winning the lottery. While private insurance and ample savings can help, those who are most vulnerable to sudden drops in earnings or unexpected expenses are often the people least able to afford these protections.

Changes in social norms and the structure of economic activity have increased both the frequency and magnitude of bad outcomes since the 1970s. With some notable exceptions, policy choices have further undermined living standards by heightening financial insecurity. This has imposed unacceptable costs on society. Expanding the welfare state should be a priority.

Nearly two million Americans lose their job each month. While many of those people find new jobs relatively quickly, many others do not: The median unemployed American has been without work for about 10 weeks. New jobs often pay far less than the one that was lost. According to a survey by the Pew Research Center, about a third of Americans experience at least a 25% change in their annual income year to year, with many experiencing changes of more than 50%.

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Even stable yearly earnings do not guarantee financial security. Many Americans deal with an incredible amount of income volatility on a month-to-month basis, often because of irregular work schedules. The economists Anthony Hannagan and Jonathan Morduch closely studied the month-to-month finances of several hundred poor and middle-class U.S. households, and they found that the typical year has several months in which their income is 50% below average and several in which it is 50% above average. This makes it difficult to plan and save for the future, which helps explain why 40% of Americans cannot cover an unexpected expense of $400 without going into debt or going to a pawnshop.

The situation today is much worse than it was a few decades ago. Back in the early 1990s, economists Peter Gottschalk and Robert Moffitt found that the year-to-year volatility of average weekly pay had doubled since the mid-1970s. While income insecurity leveled off for a few years after that paper was published, it quickly picked up again. A new study by Michael Carr and Emily Wiemers of the University of Massachusetts Boston shows that “earnings volatility has increased rapidly since the late 1990s.” In another paper, they found that this recent increase was driven by higher insecurity among men without a college degree.

One explanation is that companies have changed how they treat their workers. The era of lifetime employment and guaranteed pensions was replaced by a more efficient and competitive world of performance-based pay, 401(k) and other defined-contribution accounts, and at-will contracts. Not coincidentally, the share of private-sector workers who were union members fell from more than 20% in the 1970s to 10% by the late 1990s. As of 2017, the latest available data, the private-sector unionization rate was just 6.5%.

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The government could have offset this. Absorbing risk is one of the core competencies of the state because spreading risk across large groups is cheaper than having individuals try to take care of themselves. Unsurprisingly, governments have long been in the business of providing insurance to make people feel more secure.

New York developed the first government-backed deposit insurance system in the 1820s, although it was based on a model from Guangzhou. Central banks are effectively in the business of selling insurance by committing to lend during crises. Social insurance systems originated in Germany in the 1880s. Under Otto von Bismarck, workers got health insurance, accident and disability insurance, and longevity insurance. The British invented unemployment insurance at the beginning of the 20th century. Those systems are now standard across the world.

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Rising income insecurity was not an inevitable feature of the past few decades. Rather, it was exacerbated by policy choices, both in the U.S. and elsewhere. (The notable exceptions to this trend have been the Affordable Care Act and the subsequent expansions of Medicaid imposed by referendum.) America cut welfare spending in the 1990s, followed by Germany in the mid-2000s, when it slashed unemployment benefits to push people into low-wage jobs.

Since the financial crisis, governments across the rich world have cut back on welfare spending in a misguided effort to save money at the expense of their most vulnerable citizens. The United Kingdom used the introduction of its new “universal credit” system to lower payments to working families. Many within the U.S. want to impose work requirements on recipients of food stamps and Medicaid, even though the people most likely to need those forms of welfare are also the least likely to hold steady and regular jobs.

All this suggests there is a case for governments to expand their insurance offerings. A world with more risk is a world in need of additional hedges. These could take a variety of forms, including a guaranteed minimum income, paid parental leave, and higher payments for future retirees. Governments need to take more risk so regular people can take less.

Write to Matthew C. Klein at matthew.klein@barrons.com