What if the government insured you against a pay cut?

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Imagine losing your job, your income grinding to a halt while your bills flow in relentlessly. It hurts. You hunt for a new position, but can’t find one that matches your previous wage. Eventually you give up, and swallow a pay cut. Now imagine a government wage insurance scheme. For a limited time, it covers some of the gap between your old and new pay. The situation still hurts, but a bit less.

Between 2009 and 2022, more than 30,000 Americans didn’t have to imagine. Workers over the age of 50 who had been turfed out of their jobs for trade-related reasons could benefit from a federal programme called “Reemployment Trade Adjustment Assistance”. If people found new jobs, the programme handed out up to half their fall in wages for up to two years, to a maximum of $10,000. And a new study suggests that, remarkably, the RTAA paid for itself.

Fans of wage insurance argue that it will make workers more accepting of disruptive forces such as trade and technology. (“Let’s stuff your mouth with banknotes to stop you complaining about losing your livelihood!”) Perhaps it could even help people jump from shrinking industries to expanding ones, by limiting the upfront pay cut. Penny-pinching policymakers hope that it might sharpen the incentives to find work after being laid off.

Given that many Americans feel towards freer trade what I feel about cold baked beans, the programme has hardly transformed public opinion. Critics point out that as policies to help the disaffected go, wage insurance is pretty pricey. And, awkwardly, older evidence suggests that such handouts don’t help people off unemployment benefits. Studies of Canadian and German schemes failed to find big effects on the speed of re-employment.

The new study, by Ben Hyman of the Federal Reserve Bank of New York, Brian Kovak of Carnegie Mellon University and Adam Leive of the University of California, Berkeley, compares RTAA recipients with similar workers who were slightly too young to be eligible, as well as those whose employers unsuccessfully applied for the scheme. For those in their sample, job losses hit hard. Of workers aged 47 to 53, no more than two-thirds were employed four years later.

Some of the economists’ estimates of the effects of wage insurance will disappoint its strongest advocates. Compared with the ineligible, recipients were no more likely to be employed after four years, were no more likely to switch industry and the jobs they did accept didn’t tend to last longer.

Add to that a hefty price tag. On average, subsidy recipients got around $5,600 from the programme, though the average cost per eligible worker was lower (around $3,000) since some people didn’t know about the scheme. That is on top of an administration cost of $150 per eligible worker.

But there is some good news. It seems encouragement to find a job works, in the short-term. On average, eligible workers spent around three months less in unemployment after they first lost their job. (And finding a job quickly seems to be good for earnings.) That yielded the government as much as $11,000 per head through lower unemployment benefits and higher taxes.

Why would this American scheme look so much better when the other evaluated versions flopped? The authors claim that the disappointing results were caused by poor take-up. In Germany, workers had to apply for and be approved for the scheme before starting their new job, whereas in Canada they had to find another full-time job within 26 weeks. When the US scheme had similarly strict eligibility criteria before 2011, take-up was dismal, too.

OK, so what? Policymakers should probably gather a bit more evidence before promising wage insurance to everyone, including the young. A broader scheme could bring the risk that the labour market adjusts to change who benefits from the payments. What if the subsidies depress wages, in effect handing a bung to employers without benefiting workers? Or what if it helps eligible job-hunters, but makes securing work harder for everyone else?

At least reintroducing wage insurance for older workers affected by trade seems like a decent plan.

Historically, Trade Adjustment Assistance was a Democrat demand, balanced against Republicans’ desire for trade negotiations. But recently such bargains have been harder to strike, and as of May 20, 727 employer petitions covering 115,592 workers were in bureaucratic limbo. Only a fraction of those might be eligible for wage insurance. Still, it seems a shame that political wrangling would get in the way of a good idea.

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