Helping Workers Where it Hurts

By Robert LaLonde
Special to's Think Tank Town
Wednesday, October 17, 2007; 12:00 AM

Imagine if auto insurance policies paid for fender benders, but not for cars that were totaled. Or, if homeowner's policies paid when errant baseballs flew through windows, but not when homes burned to the ground. If insurance actually worked like this, there would be an outcry. We would feel less secure about our cars and homes. We would demand reform.

The current system of work insurance is like the auto insurance policy that covers only fender benders. If workers suffer the equivalent of a minor accident -- a few weeks without a job -- they are covered by the government's Unemployment Insurance program. But if they suffer the equivalent of a car wreck, they get nothing.

Car wrecks in the labor market do not take the form of unemployment. In the United States most displaced workers usually find new work reasonably quickly. Rather, the car wreck that threatens U.S. workers consists of wage loss, not job loss. The Displaced Workers Survey, conducted by the U.S. Bureau of the Census, indicates that 25 to 30 percent of long-tenured displaced workers find new jobs that pay less than 80 percent of their old wages. These reemployment earnings losses persist, sometimes throughout their lives. The economic effects of this wage loss are similar to having one's house burn to the ground without insurance.

Imagine a 40-year-old, displaced worker, who made $40,000 in his previous job. He can find a new job quickly, but only at $30,000, or 25 percent less than his old job. Studies suggest that this worker will probably stay in the workforce for another twenty years. If this 25 percent pay cut persists, the life-time cost of his job displacement amounts to $165,000 -- and this excludes his foregone pension and health benefits, and reduced employer contributions to Social Security. With no insurance to mitigate the loss, it is easy to see why middle class workers fear job loss and the government policies that increase their financial risk.

Congress should consider such fears as it reauthorizes the Trade Adjustment Assistance Act. Trade adjustment assistance was created to broaden middle class workers' support for free trade by providing help to workers who are hurt by liberalization. But the program falls short of its goals in three ways.

First, the primary causes of most catastrophic job loss are not related to freer trade, but are the result of changing technology and consumer demand. Second, even if trade adjustment assistance were extended to include non-trade affected workers, it still would provide too little help to offset workers' losses. Third, policymakers' contention that government supported retraining can boost displaced workers' pay enough to offset lost earnings is a fallacy. Theoretically, training could achieve that result, but the cost would be more than tenfold the current spending on training. Small wonder that trade adjustment assistance has failed to accomplish its political goal: Middle class workers do not support trade liberalization.

As I argue in a recent Council on Foreign Relations special report, The Case for Wage Insurance, to address the risk associated with losing a good job, Congress should scrap the current program and replace it with meaningful wage insurance. This insurance would not discriminate between job losers from different industries. A manufacturing worker who loses his job as a result of free trade policies should not be treated differently than a service worker who loses his job as a result of automation. The insurance would pay beneficiaries a percentage of their earnings losses once they are reemployed, but it would not make up the whole gap; this would preserve the incentive for workers to search for better paying jobs. Benefits would be available to middle-class workers, and not just to the poor, since it is the middle class that is most exposed to the threat of downward mobility. Finally, the program would pay benefits so long as workers continued to suffer substantial reemployment earnings losses.

This sort of wage insurance program would be expensive. But the benefits associated with technological progress, flexible labor markets, and freer trade -- all of which a wage insurance program is intended to promote -- are orders of magnitude larger. Depending on the details Congress chose, a wage-insurance program could cost $15 billion annually, or about 30 percent of current expenditures on the Unemployment Insurance program. If Congress wants to consider a less ambitious and less effective option, it could follow other proposals and provide two years of benefits plus a health insurance tax credit at a cost of around $3 billion annually.

To pay for a wage insurance program, Congress could increase the tax employers pay to the Unemployment Insurance system. It also could tax employees. But some of the money would come from eliminating the current Trade Adjustment Assistance program. And Congress could raise further funds by extending the waiting period for Unemployment Insurance. An extension of two weeks -- equivalent to raising the deductible on a home- or car-insurance policy -- would save about $3 billion.

Congress has an opportunity to significantly reduce middle class workers' well-founded fears of catastrophic job loss. By replacing failed trade adjustment assistance with sensible wage insurance, it can start to rebuild support for free trade agreements and other policies that promote economic growth. And it can strike a blow for common sense, ending the days of catering to fender benders and errant baseballs.

The author is Professor of Public Policy at the Harris School for Public Policy Studies at the University of Chicago. His report, "The Case for Wage Insurance," has recently been released by the Council on Foreign Relations.

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