Is Wage Insurance a Worthwhile Option for Displaced Workers?

A front-page story in today’s New York Times provides an analysis of the Obama administration’s FY 2017 budget, and particularly what reporter Noam Scheiber characterized as a “detailed agenda to ease the anxieties of workers weighed down by job insecurity and income volatility.” Below, we focus on the administration’s proposal to add wage insurance to the U.S. safety net.

Wage insurance, also termed wage-loss insurance, is known mostly within narrow policy circles, but it has found favor among some economists and public officials over the past 25 years. Wage insurance differs from unemployment insurance (UI). UI works by partially replacing lost wages during a period of involuntary unemployment until the claimant finds a new job or exhausts the benefit. Wage insurance, however, is not meant to replace past income; it’s designed to make up part of the difference between a pre-layoff wage and a future, lower reemployment wage after a jobless individual finds work. As a result, wage insurance payments come after a new job is found.

The Obama administration and past proponents of wage insurance view the program positively, as a way to speed workers’ acceptance of new jobs. According to a detailed budget document from the Labor Department, the “goal of the [wage insurance] program is two-fold: help workers who return to work at lower wages on a temporary basis as they gain a foothold in their new jobs and provide workers an incentive to return to work, even if they must take a pay cut relative to their former employment.” (Page 21.)

The administration’s wage insurance proposal involves replacing half of an individual’s wage loss arising from the acceptance of a lower-paying job. Wage insurance benefits would be limited by a $10,000 cap over the two years following reemployment, and the program would be restricted to individuals making less than $50,000 a year upon reemployment. In addition, only an individual holding his/her job for three years prior to layoff would be eligible. For example, if an individual’s income was $50,000 prior to her job loss, and she found a new job paying $40,000, her wage insurance benefits would be $5,000 paid monthly (half of wage losses) over the next two years.

Wage insurance was previously in the public eye back in 2007. NELP testified in opposition to the program then, largely because we questioned the rationale for an incentive directed largely at encouraging jobless individuals to accept lower-paying jobs, and we viewed wage insurance as a threat to the basic UI program. While, in terms of dollars and numbers of individuals impacted, the proposed new program would be modest, we have not fully abandoned our earlier concerns.

In the past, some wage insurance proponents have also proposed it as an alternative to UI, as a means to reduce the duration of UI payments, or as a way to reduce worker opposition to job losses arising from international trade. (For those interested in the details of past proposals, Stephen Wandner of the Urban Institute has recently posted a wage insurance overview on the Upjohn Institute website that is a helpful summary of prior research.)

Fortunately, the administration offers wage insurance as an independent policy initiative and not as a substitute for existing income support or displaced worker programs. Given its mixed history, however, and the many enemies of social insurance in Congress combined with skeptics in academia, wage insurance bears close monitoring in future policy debates. Wage insurance has garnered some support from conservatives in the past. There is a risk that other, more positive elements of the overall UI reform package will be jettisoned during future debates while wage insurance remains.

Our major reservation about wage insurance now is why it would make sense as a safety net priority in 2016. As we pointed out in an earlier blog, most U.S. jobless workers don’t get UI benefits at all, with only 27 of 100 jobless workers getting UI benefits in 2015, and 20 or less of every 100 jobless workers getting benefits in 14 states last year. In several states, those lucky enough to qualify for UI get weekly benefits that are capped at less than $300. Some large states have UI trust funds that are not prepared for the next recession. Other critical elements of the overall package contained in the administration’s budget address these concerns, and their importance clearly outweighs wage insurance.

Interestingly, the real-world research on the effectiveness of wage insurance is thin, especially when used for justification of a new nationwide program. Given clear evidence that straight-forward job search assistance and reemployment counseling is effective in helping jobseekers find jobs, bolstering staffed reemployment efforts looks like a smarter way to use scarce public resources. While adding wage insurance to our existing safety net package would help some workers, whether it should be a priority in 2016 remains an open question.