HOW WAGE INSURANCE COULD EASE ECONOMIC INEQUALITY
By Robert J. Shiller
Winner of the Nobel Prize in Economics
Winner of the Nobel Prize in Economics
“Wage insurance may
not be on your radar, but it should be. It helps people who have lost their
jobs and cannot find new ones that pay as well. That assistance can reduce economic inequality while
providing incentives for unemployed people to go back to work quickly.
“What’s more, wage insurance has bipartisan support, at least in
its current limited form. We ought to expand it, both through government and in
the private sector.
“Canada experimented with wage insurance in 1995, and six years
later Lori G. Kletzer, now of Colby College, and Robert
E. Litan, adjunct senior fellow at the
Council on Foreign Relations, advocated its use in the United States in an
aptly named paper, ‘A Prescription to Relieve
Worker Anxiety.’ The idea caught on: President George W. Bush and Congress embraced it
in 2002, and last June President Obama a form of wage insurance through
2021.
“There is a catch, though. The Bush-Obama insurance is limited to people who have lost their jobs to foreign workers. If a computer is now doing the work you used to do, this
insurance won’t help you.
‘The current insurance has other limits, too. It is restricted
to American workers over the age of 50 who have been earning wages up to
$50,000 a year, were employed full time and had to take a
different, lower-paying job. For people in such circumstances, the insurance
provides an amount equal to half the difference in pay, for two years, capped
at a total of $10,000
‘By some
measures, the $50,000 earnings cutoff is
fairly generous: It is almost twice the
median annual earnings of American women in 2014, $28,000, for example. The insurance is administered by the states. In New
York State, for example, the local
New York State Career Center is the place to go for this kind of assistance.
“President Obama recognizes that the current program does not go far enough. In
his State of the Union address in January
[2016] and in his budget for fiscal
year 2017 he proposed a significant expansion. While maintaining the
$50,000 income threshold, he would drop the
age requirement as well as the link to job
loss because of foreign competition.
“These changes are critical. After all, most working people in the
United States are under 50, and most job loss cannot be clearly attributed to
replacement by foreign workers. Technology is making some jobs obsolete, and
factors like recessions and shifts in demand for products and services eliminate
many jobs. In this expansion, described in a recent blog post by Jason Furman, chairman of the Council of Economic Advisers, and Jeffrey Zients, director of the National Economic Council, wage
insurance would help many people who desperately need it. We can expect some opposition to it, though,
simply because it would increase the role of government.
“But it remains insurance, and in a vibrant capitalist economy,
expanding it makes sense on theoretical grounds. Insurance is a type of risk management.
Rational people would want to pay for this benefit so that they could take promising but risky employment opportunities. It could help spur
innovation in the economy.
“With a potentially expensive program, financing is critical.
Like Social Security, an expanded wage insurance system might best be financed
by a payroll tax. To be fair, people with wages just below the $50,000 limit — who might receive
more money from the program than lower-income workers — should pay higher premiums. True
insurance needs to be priced appropriately.
“There is another objection to wage
insurance. It can create a moral hazard — an incentive to take a lower-paying, and perhaps less demanding, job than
the one the person lost. Most people will agree that people who want to work harder
and at unpleasant jobs to earn more income should not be discouraged from doing
so. There is a safeguard against this in the current
plan, which limits benefits to two years. That
reduces moral hazard, but at the expense of providing benefits with a longer
horizon. There are always trade-offs.
“The
role of government is important in this case because for social insurance, governments have a significant advantage in putting into place big ideas that are difficult to market. That was
true for federal Old-Age, Survivors and Disability Insurance in the Social
Security system starting in 1935, which was followed by an explosion of
additional private pension and disability plans. Government is needed again now.
“But ultimately, there should be two
insurance systems, a government one that is limited
to assisting lower-income workers and a private one that allows everyone —
including those with higher incomes — to buy insurance against wage loss.
“In my book, The New
Financial Order, I proposed a private
sector form of wage insurance that I called livelihood
insurance. It would be an extension of disability insurance,
which is already marketed and sold by private insurance companies. It would
just add specified job market problems to the list of covered disabilities. For example, it might
include a decline in income for, say, nurses, or a decline in the number of
people employed in nursing, or some combination of the two, with payments not
just for two years but for as long as the condition persisted. Such insurance
policies would be based on objective marketwide factors for a person’s
occupation, reducing the possibility that the insurance might encourage people
to take less demanding jobs.
“Appropriate pricing for livelihood insurance would also avoid selection bias — people with exceptionally
insecure jobs signing up in disproportionately large numbers — a problem that
government wage insurance can avoid by being offered to everyone
“If the private sector offered livelihood
insurance, people in riskier careers would
be charged higher insurance premiums. At the same time, by reducing wage risk,
the insurance would encourage people to be more adventuresome and
entrepreneurial. Risk management and insurance costs might then become
essential elements of career planning. Employers in risky industries might buy
livelihood insurance for their employees as a benefit.
“If these concepts seem unfamiliar, that is partly because privately issued livelihood insurance is not common today, if it exists at all. But that could change quickly. Expanding
government wage insurance now might clear the way for the private sector. At a
time of rising economic inequality and job dislocation, wage insurance makes a great deal of
sense.”
Robert J. Shiller, “How Wage Insurance Could
Ease Economic Inequality,” New York Times, March 11, 2016. Nobel Prize
winner Robert Shiller is Sterling Professor of Economics at Yale University and
is the author of The New Financial Order. Also search the archive for
“SPECTACULAR” using Microsoft Command f.
