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February 8, 2016

Wage insurance as a policy option in the United States

February 8, 2016

President Obama will include a wage insurance program in his fiscal 2017 budget, scheduled for release on Tuesday. The White House has already released a description of the proposed program, but it’s missing some important details that could affect whether the program succeeds in helping displaced workers transition back to work with reduced wage losses.

Workers who lose their jobs because their employers close shop or downsize have been found to suffer substantial earnings losses when they become reemployed. For these displaced workers, a wage insurance program provides a temporary wage supplement that partially reduces the loss. (Although participating workers receive a “wage supplement,” the program is called “wage insurance” if it is paid for by wage insurance premiums, usually covered by the employer or worker.)

What we know about Obama’s proposal

Obama first proposed his wage insurance program in his recent State of the Union address: “Say a hardworking American loses his job—we shouldn’t just make sure that he can get unemployment insurance; we should make sure that program encourages him to retrain for a business that’s ready to hire him. If that new job doesn’t pay as much, there should be a system of wage insurance in place so that he can still pay his bills.”

On January 16, the White House released a description of the proposed program. The president’s proposal would replace 50 percent of a displaced worker’s lost wages—up to $10,000—for up to two years. All displaced workers who had been working for their prior employer for at least three years would be eligible for the wage supplement as long as they are making less than $50,000 per year at their new job. States would be required to administer the program, but it would be federally funded.

The program’s goal is to speed reemployment and reduce the wage loss experienced by most reemployed displaced workers.

What don’t we know about the proposal?

Obama’s preliminary proposal does not discuss a qualification period; that is, how quickly displaced workers would have to return to work to be eligible for wage supplements. Wage insurance programs are directed almost exclusively at displaced workers who are eligible for and receive unemployment insurance (UI). Yet one issue that has not yet been specified is how the qualification period for wage insurance intersects with UI’s eligibility period.

Many past wage insurance proposals—and a Canadian demonstration project—require displaced workers to take a new job within 26 weeks in order to qualify for wage supplements. That period would be too long in the United States, because regular UI benefits also last for 26 weeks. UI recipients, therefore, might collect all of their unemployment benefits before they take a new job. A shorter qualification period of, say, 15 weeks would do more to speed the return to work and reduce UI-compensated durations of unemployment.

Also, the cost of a wage insurance program is uncertain, although it would vary with the program’s specifications. Past wage supplement proposals have ranged from approximately $5 billion to $20 billion. While some of these variations are based on design differences, it appears to be difficult to accurately estimate the cost of wage supplements.

Obama’s proposal would be the first large-scale wage insurance program in the United States

Although many wage insurance programs have been proposed, it’s hard to know what a full-fledged one would look like because we’ve never had a pilot or demo. Only one small wage insurance program exists in the United States—the Alternate Trade Adjustment Assistance (ATAA) program, which is part of the Trade Adjustment Assistance program—but it’s on a much smaller scale.

The ATAA program provides wage supplements to workers age 50 or older, who have lost their jobs as a result of foreign trade, and who earn less than $50,000 per year. These displaced workers can receive half of their lost wages over two years, but no more than a total of $10,000.

President Obama’s proposal looks a lot like the ATAA program, but it is targeted to all displaced workers, regardless of age or the cause of their displacement.

It will be interesting to see how a large-scale program affects displaced workers. Design details and costs matter, so we’ll need to look carefully at the full proposal when Obama’s budget is released.

President Barack Obama speaks about the economy, Friday, Feb. 5, 2016, during a news conference in the Brady Press Briefing Room of the White House in Washington. The president said the U.S. has the strongest, most durable economy in the world. He pointed to wage and income growth, job growth, lower oil prices and increasing health insurance as evidence. Photo by Susan Walsh/AP

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