Looking into wage insurance

During his State of the Union address earlier this year, President Obama outlined a wage insurance plan that would provide income loss coverage for American workers who are laid-off and subsequently forced into lower-paying jobs out of economic necessity. The wage insurance policy, which has been included in his budget proposal, would provide benefits to those who have worked the same job for at least three years before being laid off and have then been forced to take a lower paying job. It would replace wages at a rate of 50 percent of the difference between pre and post-unemployment salary for two years (up to $10,000) so long as the post-unemployment salary is less than $50,000.

The idea itself isn’t new. Robert LaLonde at The University of Chicago wrote The Case for Wage Insurance in 2007. A very similar program known as Reemployment Trade Adjustment Assistance provides benefits to workers of age 50 years or older who are forced to reenter the workforce at a lower paying job after having been laid-off due to shifts in production outside of the United States (essentially meaning lay-offs due to any negative domestic effects on the labor market from trade, including imports). Moreover, the wage insurance policy has explicitly been tested before by our neighbors to the north. In the mid-1990’s, Canada tested a form of wage insurance through the Earnings Supplement Project. The project concluded that there was no significant decrease in the length of unemployment for benefit recipients, but there was a 4.4 percent greater propensity for beneficiaries to move into full-time work. It is also worth noting that some companies and unions provide supplemental unemployment benefit plans as well.

Many arguments have been made against wage insurance, including the empirical evidence from Canada which suggests that the wage supplements would have miniscule effects on ameliorating the labor market. The argument of incentive distortion seems to be the primary one worth acknowledging. Essentially, critics argue that if employers are aware of this quasi-subsidization of lower-paying jobs, then they will have reason to believe that they can pay people less knowing that the government will provide additional income. This argument has been extended further to suggest that the policy will only further reinforce stagnant wages in the economy. In the Canadian study, it was found that the average income of beneficiaries decreased by 5 percent in their new jobs. This was likely because people were disincentivized from holding out for a higher-paying job if they could collect more on wage insurance. However, there is reason to believe that this is a positive phenomenon. Some economists suggest that even pay cuts associated with certain positions might provide on-the-job retraining that could position workers for better employment down the road. The models here, of course, suggest that with training and time increased productivity will eventually result in increased wages.

Other arguments have cited the somewhat contradictory nature of the expansion of unemployment insurance that the President calls for in his proposed budget alongside wage insurance. The President’s proposal would call for all states to provide at least 26 weeks of UI coverage. Nine states currently provide less than 26 weeks of coverage, and our very own state of North Carolina covers a maximum of 13 weeks. Some critics suggest that if wage insurance is being implemented, we should be cutting back on UI to further incentivize employment.

Despite all of the controversy surrounding the wage insurance idea, it is certainly an interesting proposal that might actually resonate with both sides of the political spectrum even though Obama’s proposed budget will likely receive little real attention from the House and Senate committees. The right has often censured the current unemployment system for incentivizing Americans not to take jobs, especially ones that pay less than unemployment benefits. Wage insurance, on the other hand, only pays out benefits once a new job has been obtained. The President believes that this plan will encourage laid-off workers to seek new employment quicker, reduce long-term joblessness, and prevent people from being so quick to leave the labor market. It does, however, seem that the de facto reason behind its implementation would be to provide a safety net for three particular demographics: (1) long-tenured workers who have been laid-off, (2) people with outdated skillsets whose roles now require the use of technology or whose roles have been replaced by technology, and (3) people who work in jobs in industries that are being sent overseas. Ideally, members of these groups would be incentivized to take lower-paying jobs that will retrain them and provide the skillset necessary to obtain a future job with higher earnings.

The new benefits would be paid for through a slight change to the current unemployment insurance taxation system. The current Federal Unemployment Tax Act defines a 6.0 percent tax on the first $7,000 of an employee’s income and permits states to go anywhere above this $7,000 base. Employers receive a 5.4 percent credit against the tax, meaning that the effective FUTA rate is actually 0.6 percent. Trivial, really. The current FUTA is just so old that inflation has made it defunct; the $7,000 base was set in 1983. In 1939, when the system was established, the wage base was initially set at $3,000. In today’s dollars the wage base should be roughly $45,000. Obama’s budget plans to raise the wage base to $40,000 to capture more revenue and to provide the funding to move forward with the wage insurance plan. This is, at least, his intention.

To conclude, most of the need for wage insurance can be attributed to the rise in technology and trade that have had somewhat negative consequences for domestic lower-wage workers, particularly in the manufacturing, construction, and transportation sectors. President Obama hopes that the wage insurance plan will allow Americans to continue to enjoy the immense benefits of trade and technology without sacrificing domestic labor. However, while the motion for reemployment in place of unemployment is an important one, it is unclear whether or not wage insurance will be an effective and cost-neutral response. Regardless, we probably won’t see it implemented anytime soon due to the current political situation. What is important, however, is that wage insurance has been put forth as an idea to discuss and critique. The problems with structural unemployment that it addresses are real, and a potential solution has been put on the table to rekindle an old conversation.

Ajay Desai is a Trinity freshman. His column runs on alternate Tuesdays.