universal wage
Universal Wage Insurance and Lifetime Retraining
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universal wage
Good Ideas Whose Time Has Come • by robert litan
universal wage

robert litan, a former deputy assistant attorney general in the Clinton administration, is an adjunct senior fellow at the Council on Foreign Relations and a partner in the law firm korein tillery.

Illustrations by James Yang 

Published October 19, 2016


Regardless of who wins the White House in November – and in spite of all the distractions of this bizarre campaign season – it's a sure bet that the election will be remembered as the year voters revolted against globalization in general and open-trade policies in particular. Nor has this reaction been confined to the United States. Britain's shocking decision in June to abandon the European Union was a product of the same forces of reaction to economic integration with anti-globalization overtones.

In my view, none of this should come as a surprise. What is surprising is that the rebellion took so long to break out.

For decades, it's been gospel in Washington (and in European capitals) that the gains from open trade outweighed the losses. This deeply held belief, reinforced by a mountain of research, powered the negotiators of multiple trade agreements – global ones, like the Tokyo (1979) and Uruguay (1994) rounds of the multilateral General Agreement on Tariffs and Trade (which led to the formation of the World Trade Organization), regional deals like Nafta, and bilateral deals like the ones the United States has with Australia, Chile, Israel, Korea, Panama, Peru and Singapore that cumulatively stripped away most protection from domestic producers.

Even the most faithful followers of Adam Smith and David Ricardo, however, understand that no trade deal benefits everyone. That's why most free traders generally favored the Trade Adjustment Assistance program, which provides aid to workers who lose their jobs. The program was first enacted in 1962 and has been modified multiple times in the intervening years. For some, trade adjustment is a simple matter of economic justice: affluent societies shouldn't let workers bear the brunt of the collateral damage from globalization in the name of the collective good. For others, it's a matter of political reality: the assistance program would serve to weaken organized labor's opposition to open trade.

In fact, unions supported the original program, though with time they came to dismiss assistance as "burial insurance" and now actively oppose ongoing efforts toward global integration – most recently, the Trans Pacific Partnership. The explanation for labor's disenchantment is straightforward. In many cases, it's hard to distinguish workers who lose their jobs to trade from those who lose them for the myriad other reasons that industries rise and fall in a technologically driven economy. And the program's administrators are not in the business of giving every displaced worker the benefit of the doubt.

Moreover, when workers do qualify, compensation often seems inadequate. The Trade Adjustment Assistance program provides extended unemployment insurance, which in recent decades has been tied to required participation in retraining programs – many of which have poor track records at providing jobs at anywhere near the wages displaced workers previously earned.

More fundamentally, neither the Trade Adjustment Assistance program nor any other federal program has helped workers who were let go because their employers found it cheaper to automate their work – or simply because consumers' tastes have shifted away from the products and services they made or provided. The fact that these non-trade factors have surely accounted for far more worker dislocation than trade ever did has not deterred critics of trade deals. Liberalized trade at least is something that governments can stop or even reverse. Not so, or at least not so easily, with job-displacing innovation and changing consumer demand.

Accordingly, any program designed to ease worker dislocation that is narrowly targeted at cushioning the job loss caused by trade competition alone is bound to fail in political terms. Trade liberalization has become just too easy for elected officials – or those wanting elected positions – to blame for job losses. If the economy were growing rapidly, constantly churning out jobs paying good wages for the vast majority of workers, this blame game would be more difficult to pull off. But with slow growth and widening income inequality over the past 15 years, the table was set for the backlash against trade that has been so evident this year.

Economic headwinds, due overwhelmingly to factors having nothing to do with trade, make it even more important for those who want to preserve (or expand on) current open-trade policies to do a far better job of managing economic dislocation. Moreover, from a purely moral perspective, the country owes displaced workers a leg up, whatever the cause of their distress. This includes addressing the free-rider problem that inhibits firms from doing more worker retraining themselves for their employees. Companies are understandably reluctant to spend to improve workers' skills when those individuals can simply move to other jobs – especially when economic times are good.

So, what follows are two proposals designed to reduce frictions on both sides of the labor market – to ease workers' legitimate anxieties about economic change from whatever source, and to encourage employers to provide more training – while improving the chances that more Americans can live the American Dream even in a turbulent economy.


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Wage Insurance

You can insure against many of the risks in life – damage to property, losses linked to ill health and so forth. But you can't buy insurance against losing your place in the economic pecking order. Society's answer to job loss – temporary (and modest) unemployment insurance – is a feeble substitute.

Why this particular limitation? Private insurance carriers won't sell you a policy against permanent wage losses because of the problem of "adverse selection": The people most likely to buy the insurance would also be the most likely to suffer a loss. It's analogous to the adverse-selection problem that led an initially reluctant President Obama to require everyone to buy coverage as part of the Affordable Care Act. If enrollment were voluntary, the insurance rolls would be disproportionately burdened by the sickest individuals, raising the cost of providing insurance and discouraging everyone else from buying it.

The United States first limited the adverse-selection problem for temporary income loss arising from involuntary unemployment when it gave the states incentives to provide broad-based, employer-financed unemployment insurance. (Britain, by the way, was the first country to adopt unemployment insurance, in 1911.) I have spent much of my professional career arguing that government ought to extend the protection to include longer-term losses in wages. Back in 1986, Robert Lawrence, then an economist at Harvard, and I proposed wage insurance for workers displaced by trade, an idea that Congress adopted for workers over the age of 50 in 2002. In the 2016 State of the Union address, Barack Obama became the first president to endorse the broader idea of government wage insurance for the entire middle-income labor force.

The details of wage insurance now in place and plans urged for wider adoption have essentially not changed for several decades. Workers displaced by trade who toil for at least three years on their prior jobs receive half the difference between the shortfall of their new wages and the pay of their previous job, up to a cap of $10,000 per year. So a worker who was laid off a $40,000-a-year job and replaced it with a job paying just $30,000 would receive half the difference – $5,000 a year – from the government.

Importantly, the insurance payments begin only after workers have obtained the new jobs and end two years from the date of initial unemployment, giving them strong incentives to take early offers and not remain idle waiting for better offers that may never come while they collect regular unemployment benefits.

The Obama proposal is basically a much broader version of the wage insurance element currently embodied in the Trade Adjustment Assistance program. It would cover all workers who lose jobs paying no more than $50,000 for any reason (not just trade) and take new jobs at reduced wages. The president's proposal is hardly a panacea, but it would go some distance toward addressing the fears of the large portion of the electorate worried about being pushed off the economic ladder by trade or other forces beyond their control.

Several analyses made before the Great Recession indicated that such a broader wage insurance program would cost in the neighborhood of $3 billion to $5 billion a year. The Congressional Budget Office has provided the most recent cost estimate, post-2008, of just $27 billion over 10 years, or less than $3 billion annually. That's lower than prior cost estimates, primarily because of the $50,000 earnings eligibility cap. Outlays of these amounts could easily be financed by a small increase in the federal unemployment insurance tax. But even if the program had to be financed out of general revenues, it would be a small price to pay for addressing the very real concerns of tens of millions of Americans – and perhaps give Washington some backbone in defending an open-trade system that generates net benefits for the economy.

If it were up to me, I'd be more generous than the Obama proposal, covering workers making up to $100,000 on their previous jobs, perhaps even if they held those jobs for less than three years. I would also be more comfortable if the annual payments were more generous, tying them to inflation or raising the maximum annual payment to $15,000 or $20,000.

One reflexive objection to wage insurance is that it would extend benefits to all middle-income earners with full-time jobs, some of whom would resent handouts from Uncle Sam. But this objection hardly bears close examination. For one thing, wage insurance is a hand up, not a handout, for people who are already helping themselves to recover from job displacement by accepting less-lucrative employment. Conceptually, it is no different than the subsidies the government has awarded buyers of electric cars in order to slow climate change – a source of "help" that I suspect few, if any, of the green buyers resented.

In principle, wage insurance should have strong bipartisan appeal. Democrats should recognize that income losses linked to a step down in employment is often as great a worry among low- and middle-income workers as short-term unemployment is, and so should welcome insurance as a legitimate extension of the social safety net. Republicans, for their part, should be attracted by the incentives the program creates for displaced workers to find new jobs quickly.

Of course in this era of Congressional gridlock, sweet reason alone will not get just any good idea enacted. But consensus might yet be found if the right interest-group coalition were mobilized. The business community, which is potentially threatened by the antigrowth populist backlash, should back the idea if it can get past the objection that the program would cost its members a very modest amount of money, some of which could be passed on in the form of slightly higher prices (there are few free lunches in this world). So, too, should the elected officials of states and localities that depend heavily on exports.

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Lifetime Retraining-Loan Accounts

My second proposal is retraining with a twist. Wage insurance would not only help the displaced workers who would directly benefit from it, but would act like a subsidy to firms for providing on-the-job training – the most effective job training of all. That's because with the wage-insurance payments in hand, displaced workers would be more likely to accept the lower wages that firms can afford to pay to workers who lack the precise skills needed to reach peak productivity on day one. Federal wage insurance would thus considerably augment the tax credits that some states now make available to firms for retraining expenses to offset the free-rider problem of training workers who are subsequently free to take their new skills elsewhere.

But finding a new job more quickly with the aid of wage insurance wouldn't help displaced workers who want to train for new careers, but don't have the means to pay for that training. According to a 2016 Federal Reserve study, roughly half of American adults have less than $400 (no misprint) in ready cash to meet an emergency. So relatively few would be able to drop out of the labor force and go back to school for an extended period, even if they had working spouses.

The federal government has well-established programs for providing grants and subsidized loans for young adults going to college, and the federal tax code allows individuals of any age to claim a lifetime learning tax credit of up to $2,000 per year against tuition and fees for attending a qualified educational institution. There's a catch, though: they don't provide the cash upfront for those lacking the means to pay in the first place.

Loans can bridge this gap. But traditional bank loans for going back to school, especially for those past traditional college years, can be difficult if not impossible to get without collateral and may be restricted to people who are enrolled at least half-time in an educational program. It's much harder to get a conventional bank loan if you're going to night school, taking, say, one course a semester, and working during the day.

Moreover, private-sector college loans have conventional terms. I have looked, but can't find, private bank loans whose repayment is tied to income, as is the case with income-contingent repayment options that are an available (if rarely used) option on regular federal college student loans. Such loans are especially advantageous for students worried about their ability to make their loan payments if they are laid off, or if their new careers don't prove as lucrative as they hoped. With income-contingent repayment, at least they won't go bankrupt or have their credit ruined if their plans don't work out or if forces beyond their control – an economic recession, a personal medical crisis – prevent them from climbing the career ladder.

But even with these limitations, the Department of Education estimates that as many as 90 million Americans, a significant portion of whom have aspirations for new careers, take part in some form of adult education each year. Let's have the federal government make income-contingent repayment loans available to all adults throughout their working lives, up to the age at which people qualify for full Social Security benefits. Repayment schedules could be calculated and easily enforced using a few extra lines on households' annual federal income tax forms.

Federal retraining loans, like other college loans, would be funneled through the educational institutions that the trainees attend; this would remove the temptation to divert loan funds for non-education expenses. To minimize the potential for rip-offs by fly-by-night trade schools, federal loans would be available only through institutions meeting minimum standards – among them, a threshold placement rate for new grads, plus full disclosure to prospective students of where grads have been placed and at what salaries.

As with the current income-contingent repayment student loans, the lifetime income-contingent repayment loan accounts should have a cap on repayment somewhat above the amounts borrowed in order to cover the costs of borrowers who don't earn enough to repay the full amount. It is even possible that the government would make money on the program if most workers do well after retraining.

It is more likely, however, that the costs of under-payers would exceed the gains from the full payers. But again, like wage insurance, this would be a cost worth bearing because it would ease friction in the labor market and very likely contribute to an overall improvement in the productivity of the labor force, generating tax receipts and gains to consumers and producers not directly attributable to the program.

This spillover effect raises a Bernie Sanders question: if society as a whole benefits, why shouldn't lifetime retraining be free? One answer: given the budget math showing increasing deficits over the next several decades due to rising entitlement costs, it would be fiscally irresponsible to add even more to the deficit. Yes, in theory, taxes could go up to pay for this particular idea, but Democrats in particular already have pledged rising taxes to pay for other new programs.

Deficits and taxes aside, there is something to be said for requiring people to pay for their education or retraining. Knowing they are on the hook for at least some amount would create an incentive for workers to shop for training more carefully, as well as encourage educational institutions to compete by providing top value for their students' dollars. Note, too, that the proposed income-contingent repayment system would limit repayments by borrowers who, for one reason or another, are unable to recoup their investments.

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The Ills That Wage Insurance and Retraining Cannot Cure

Some perspective is warranted here. Wage insurance and lifetime retraining focus on the issue of income insecurity – the reality that it is far too easy to slip off the economic ladder and never fully recover. Neither program is designed to make much difference for Americans who enter the labor market with marginal education and skills.

I don't have a silver bullet to fix the daunting moral and political problems associated with income inequality and inadequate social mobility. But I am confident that we need to be more open to changes, ranging from charter schools to limited minimum-wage increases to expanded earned-income tax credits for low-wage workers.

Arguably most important, we need to dispense with the idea that government is the natural enemy of efficiency and economic justice. There are certainly plenty of ways in which government intervention can backfire, reducing the size of the economic pie by means of ill-considered regulation or by defending the privileges of incumbent businesses that find it cheaper to compete in the "political market" than in the markets for goods and services.

But the pendulum has swung too far. To manage the consequences of the sorts of economic displacement that seem inevitable in a rapidly changing global economy, we need smarter government – not less of it.

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