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Wage Insurance Could Generate Support for Free Trade, Says New Council Special Report

September 19, 2007
Council on Foreign Relations

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With trade adjustment assistance (TAA) set to expire at the end of the month, several reform bills that would expand unemployment insurance, an important component of traditional TAA, are being considered in Congress. A new Council Special Report argues against these proposals and calls instead for shifting resources to wage insurance—also known as displacement insurance—programs.

Wage insurance is a safety net that provides an earnings supplement for workers facing a long-term reduction in wages. Such an approach could ease workers’ fears of job and income loss and therefore diminish opposition to free trade policies, argues the report, The Case for Wage Insurance. This would benefit the U.S. economy, as “trade helps to lower prices, raise real incomes and promote economic growth,” says report author Robert J. LaLonde of the University of Chicago.

 “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,” says LaLonde. He explains that, in such an economy, workers are routinely displaced. Often, this shift is fairly painless and workers are able to find new jobs in a reasonable amount of time but, for workers with a long tenure at their previous employer, the wages paid at a new job may be much lower than what they earned before.

The report, produced by the Maurice R. Greenberg Center for Geoeconomic Studies, contends that most of the services currently available to displaced workers do not address the risks faced by prime-aged and older workers, who are more likely to suffer large, long-term income losses. “Current policies emphasize unemployment insurance, which is appropriate if the main cost of job loss is associated with temporarily lower income while unemployed. But for many long-tenured displaced workers, the greatest cost of job loss is associated with lower wages following reemployment. Existing policies do not address this long-term reduction in income.”  

LaLonde proposes replacing existing programs with a displacement insurance plan that would provide an earnings supplement to prime-aged and older workers who get rehired at lower wages. He also argues that standard displacement insurance proposals must provide adequate coverage in order to be effective: “Most displacement insurance proposals cap benefits at around $10,000 per year and limit the duration of benefits to two years. These program characteristics would exclude many middle-aged, middle-class displaced workers who experience the largest wage and income losses as a result of displacement.”

The report, part of the Bernard and Irene Schwartz Series on American Competitiveness, describes the options for financing displacement insurance, which include requiring employers or workers to pay higher insurance premiums, or policymakers to divert resources from other programs.

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Robert J. LaLonde is a professor in the Harris School of Public Policy at the University of Chicago. Professor LaLonde first joined the University of Chicago in 1985, where he taught for ten years at the Graduate School of Business and the Harris School. From 1995 to 1998, Professor LaLonde served as an associate professor of economics at Michigan State University. He has been a research fellow at the National Bureau of Economic Research since 1986, served as a senior staff economist at the Council of Economic Advisers during the 1987–88 academic year, and was the deputy director of the Northwestern University–University of Chicago Joint Center for Poverty Research. He currently serves as a faculty affiliate with the University of Chicago’s Center for Human Potential and Public Policy.  

Council Special Reports(CSRs) are concise policy briefs that provide timely responses to developing crises or contribute to debates on current policy dilemmas. CSRs are written by individual authors in consultation with an advisory committee. The content of the reports is the sole responsibility of the authors.

Directed by Sebastian Mallaby,former editorial board member at the Washington Post, the Maurice R. Greenberg Center for Geoeconomic Studies works to promote a better understanding among policymakers, academic specialists, and the interested public of how economic and political forces interact to influence world affairs.

Founded in 1921, the Council on Foreign Relations is an independent, national membership organization and a nonpartisan center for scholars dedicated to producing and disseminating ideas so that individual and corporate members, as well as policymakers, journalists, students, and interested citizens in the United States and other countries, can better understand the world and foreign policy choices facing the United States and other governments.

Contact: CFR Communications, 212-434-9888, communications@cfr.org

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