The Case for Wage Insurance

EXECUTIVE SUMMARY
An important component of U.S. productivity growth and economic competitiveness is a
flexible labor market that shifts workers quickly into the jobs where they are most needed.
Much of the time, this job shifting is fairly painless: Workers quickly find new positions
that pay at least as much as their previous ones, often without an intervening spell of
unemployment. But prime-aged and older workers can sometimes suffer large, long-term
income losses. Such workers’ well-founded fears about job displacement lead them and
their advocates to resist policies such as free trade that are sometimes blamed for job loss.
This resistance harms the majority of households because trade helps to lower prices,
raise real incomes, and promote economic growth. It also has foreign policy consequences
since it threatens the United States’ ability to play its traditional post–World War II role
as the bulwark of a relatively open international trading system. And by reducing the
dynamism of the U.S. economy, resistance to trade and other pro-growth policies can
weaken the nation’s long-term ability to exert global leadership.
This Council Special Report documents the causes, risks, and consequences of
worker displacement. It describes the services currently available to displaced workers,
and contends that most of these services do not address the risks faced by prime-aged and
older workers, even when they are cost-effective and appropriately designed for less
vulnerable members of the workforce. Current policies emphasize unemployment
insurance, which is appropriate if the main cost of job loss is temporarily lower income
while unemployed. But for many long-tenured displaced workers, the greatest costs of job
loss are lower wages following reemployment. Existing policies do not address this longterm
reduction in income.
This report recommends that policymakers aid prime-aged and older workers who
get rehired at lower wages by providing them with an earnings supplement. This
“displacement insurance” pays benefits to eligible workers only after they find new jobs
and only if their new earnings are less than their old ones. When targeted at those who
face the largest and most persistent long-term losses from losing a job, displacement
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insurance can begin to address the substantial risks that many prime-aged and older
workers confront in a dynamic economy.
There is broad consensus among labor policy experts on the necessary
characteristics of displacement insurance. By limiting benefits to 50 percent of the
difference between pre- and post-displacement earnings, most displacement insurance
proposals provide incentives for displaced workers to search for more productive jobs at
higher wages, reducing the moral hazard inherent in any insurance program. Further, most
proposals do not discriminate between displaced workers by making the insurance
conditional upon being from a declining industry or geographic area or on being from a
trade-affected industry or firm; nor are conditions attached to age or the duration of
joblessness. Displacement is not limited to workers in a particular sector or region of the
country or age group, the argument goes, so there is no reason to exclude some bigearnings
losers while including others.
The shortcoming of these standard displacement insurance proposals is that they
fail to provide adequate coverage to many prime-aged displaced workers who experience
permanent and severe income losses. Most displacement insurance proposals cap benefits
at around $10,000 per year, limit the duration of benefits to two years, and exclude
workers earning above $50,000 per year. These program characteristics would exclude
many middle-aged, middle-class displaced workers who experience the largest wage and
income losses as a result of job loss. But even with these workers excluded, the standard
insurance proposals nonetheless cost $3 billion to $4 billion per year, financed with a
monthly tax or “insurance premium” of approximately $2 to $3 per worker.
Unfortunately, to displaced workers experiencing substantially reduced lifetime
earnings as a result of displacement, a two-year earnings supplement provides limited
comfort. To aid vulnerable prime-aged workers, displacement insurance should provide
benefits that extend beyond two years. But such extensions require either workers or their
employers to pay higher premiums, or policymakers to divert substantial resources from
other programs.
If proposed displacement insurance premiums were doubled, policymakers likely
could provide benefits for four years following job loss. That would be enough to provide
meaningful coverage against permanent earnings losses for workers who are nearing the
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end of their working lives. But such an extension would still cover only a small portion of
the losses experienced by some prime-aged displaced workers who anticipated working
for another fifteen to twenty years prior to losing their jobs.
In principle, a more comprehensive displacement insurance program could be
financed by further raising premiums paid by either workers or their employers. But
policymakers also should consider diverting resources from other labor market programs.
As explained in this report, existing retraining initiatives offer a false promise of
meaningful aid. Resources currently earmarked for retraining could be used to help
finance displacement insurance, thereby giving displaced workers the choice of using
their benefits to supplement their incomes or to pay for training programs if that is their
preference.
Alternatively, policymakers could finance displacement insurance by diverting
resources from the existing unemployment insurance program. This approach amounts to
changing the emphasis of the safety net from solely insuring against relatively small
temporary earnings losses for many workers toward providing insurance against
extremely large permanent earnings losses experienced by relatively few workers. One
way to change the emphasis incrementally is to extend the waiting period before
unemployment insurance claimants start to receive benefits.
To be sure, all the foregoing options for financing displacement insurance are
controversial. But this report contends that there are compelling rationales for each one.
By extending the benefit period of existing displacement insurance proposals, they would
assuage many prime-aged and older workers’ well-founded fears of job displacement. In
so doing, they would bolster the political consensus in favor of flexible labor markets,
consolidating American competitiveness and the nation’s ability to sustain its leadership
around the world.