The case for wage insurance to offset future job disruption

The U.S. economy has enjoyed a period relatively strong job growth coming out of the worst of the pandemic. That’s come with wage gains, as well. But, of course, many workers remember times when the opposite has been true.

In the 1970s and ’80s, there were the early waves of deindustrialization that cost U.S. companies jobs. In the ’90s, a corporate restructuring binge resulted in layoffs for office workers. And in the early 2000s, an increase in Chinese exports to the U.S. resulted in a manufacturing employment decline.

So turning back to the present, as artificial intelligence spreads and decarbonization changes the energy industry, will we see another major shift in employment? And how can workers survive that shift without losing out completely? One idea: wage insurance. Marketplace’s senior economics contributor Chris Farrell has been looking into that. He spoke with “Marketplace Morning Report” host Sabri Ben-Achour. The following is an edited transcript of their conversation.

Sabri Ben-Achour: So a dynamic, evolving economy both creates some jobs and destroys others. If we cannot prevent the destruction part, how do we do something for the workers who are, you know, put through that meat grinder?

Chris Farrell: Just over the decades, too many employees have felt the downside from this famous expression by Joseph Schumpeter: “the gale winds of creative destruction.” And it doesn’t matter whether blame is international competition or automation — some workers lose out really big, especially lower-wage workers.

Ben-Achour: There is unemployment insurance that can help manage the financial fallout from losing a job. Is that enough?

Farrell: No, it really isn’t. Scholars have documented workers who lose their jobs, especially in these long periods of restructuring a mass layoffs, they have substantial earning losses, they have longer spells of unemployment, and they have less wealth. So one idea — and I think this is really an intriguing idea to help lower-income laid off workers make a quick and successful transition to a new job — is wage insurance. At least that’s what I thought after reading a recent research paper by three economists, “Wage Insurance for Displaced Workers.”

Ben-Achour: Wage insurance is not a new idea, but it’s kind of an obscure one. What is the difference between wage insurance and unemployment insurance?

Farrell: Sure. So here’s the basic idea: Let’s say a 52-year-old assembly line worker living in rural Tennessee loses her job because of foreign competition. She gets another job at a local big box retailer, but the new job comes with a wage cut. Wage insurance kicks in and for the next two years or so, the payments reduce her wage cut in half.

Ben-Achour: Do we have anything like that? I mean, have we ever had anything like that?

Farrell: So the one that really stands out is the wage insurance provision in the federal government’s Trade Adjustment Assistance Program. And the wage insurance program, it was for workers 50 years and older, it pays up to half the difference between the workers pre- and post-separation wages for up to two years, and you must have lost your job to foreign competition. And it’s only available to workers who are earning $50,000 or less in their new jobs.

Ben-Achour: I mean, you think that should be expanded? You think that’s workable for everybody else?

Farrell: I really do think it should be expanded. I mean, when I look this economic study, they said the main benefit with wage insurance is that it acts as an insurance to take a job quickly. And they found that the program not only substantially increased the odds of workers getting employment, but also their cumulative earnings. So for these reasons, it seems like wage insurance, it should be expanded to help out lower-wage workers who lose their jobs, say, to international competition or to automation — some major competitive force in today’s economy.

Ben-Achour: It sounds kind of expensive. Is it?

Farrell: It would be expensive, which is one of the reasons why you would limit it to your lower-wage workers and not for everybody. So you keep the cost down by focusing on lower-wage workers.