How to get Americans back to work
Part of the story is that the fates of the short-term unemployed and the long-term unemployed have sharply diverged. The short-term unemployment rate, as Annie Lowrey of the New York Times has observed, is lower than its pre-recession level, while the long-term unemployment rate remains very high.
We need to find better ways to help the 3.7 million American workers who’ve been out of a job for six months, and the twice-as-large number of workers who are working part-time although they’d prefer full-time employment. But we would also do a great deal of good by ensuring that the short-term unemployed don’t remain on the sidelines for long.
That is why America needs wage insurance – a form of insurance that would subsidize a worker’s income if she were forced to take a job with a lower salary. The goal of wage insurance is to encourage workers to broaden their job search and to subsidize on-the-job training as they move from one kind of employment to another. A woman who worked in construction for most of her adult life might have a hard time transitioning to the hospitality industry, for example, and starting from scratch in an entry-level job would mean accepting a low wage. Wage insurance would cushion her and her family against this drop in income, and it would give her an opportunity to raise her skill level so that she could eventually command a higher wage from her employer.
Wage insurance was first introduced in 2005, by policy scholars Lael Brainard, Robert Litan and Nicholas Warren. The goal of the program was not to shield workers from all risk, but rather to provide them with a strong incentive for rapid re-employment. Workers who lose their jobs and then find jobs that pay less would receive an insurance payout that would cover up to 50 percent of the earnings gap, up to $10,000 a year for no more than two years.
The authors estimated that the program would cost roughly $3.5 billion a year (in 2005 dollars), and saw it as a way to protect the interests of workers permanently displaced by off-shoring and technological change.
Yet because the authors had no way of imagining the Great Recession and its impact, they ultimately understated the case for their proposal. Had we implemented a well-designed wage insurance program in the mid-2000s, we may have avoided much of the pain associated with the recent downturn.
To be sure, a wage insurance program would have cost more in recent years than Brainard, Litan and Warren had anticipated in 2005, particularly when the labor market was at its worst. But if the program had prevented millions of workers from entering the ranks of the long-term unemployed, it would have more than justified its expense.
One of the most attractive aspects of the proposal from Brainard, Litan and Warren is that it starts the clock on its two-year eligibility window after just a few weeks of unemployment. The sooner a person takes another job, the bigger the insurance payout she would ultimately receive. This provision would reduce the cost of traditional unemployment insurance while also limiting some of the damaging effects of being out of work.
Critics of the program worry more about “undermatching,” in which workers rush to take jobs for which they are overqualified, thus reducing their long-term earning potential. But the threat of undermatching must be balanced against the heavy economic and social costs of long-term unemployment. Wage insurance would reduce the costs associated with undermatching, and it wouldn’t prevent workers from returning to their old industries if or when they recover.
Granted, a new wage insurance program can’t do much to help the millions of workers who have already entered the ranks of the long-term unemployed. But it can spare future workers from the same fate.