Wage Insurance Proposal Draws Approval Across The Political Spectrum

UC Santa Cruz economist addresses worker anxiety about job loss

SANTA CRUZ, CA–A wage insurance proposal coauthored by economist Lori Kletzer of the University of California, Santa Cruz, tackles the painful subject of U.S. worker dislocations caused by technology, trade liberalization, and downsizing. The proposal has attracted support from a broad spectrum of government policy makers, free-trade proponents, and commentators, including Carla A. Hills, the United States Trade Representative who served under then-President George Bush.

Designed to help all workers who lose their jobs through no fault of their own, the wage insurance proposal would provide up to two years of financial assistance to workers who get a new job that pays less than their previous job did. The proposal recognizes that the emerging global economy has negative effects on some workers, and it broadens the safety net to include workers who have been dislocated for any reason.

"Trade liberalization is a focal point for anxiety about American jobs, and public opinion reflects that," said Kletzer, referring to a recent poll by the Pew Research Center for People and the Press that found that 78 percent of respondents said "protecting the jobs of American workers" should be the top priority in shaping U.S. trade policy. If the U.S. is to recapture its leadership role promoting international trade liberalization, advocates of free trade must address this widespread public concern about job loss as they broaden the agenda to include labor and environmental standards, said Kletzer.

The policy brief, "A Prescription to Relieve Worker Anxiety," was published simultaneously this month by the Institute for International Economics (IIE) and the Brookings Institution. Coauthor Kletzer, an associate professor of economics at UCSC, is a visiting fellow at IIE this year, and Robert E. Litan is vice president and director of the Economic Studies Program at the Brookings Institution. The brief is available on the web at [http://www.iie.com/newsletr/news01-2.htm.][2]

"The benefits of free trade are clear, but proponents of free trade have failed to acknowledge that as we move into a globally integrated international economy, some people will lose their jobs," said Kletzer, an advocate of further trade liberalization when it is accompanied by legislative and fiscal measures to address the costs borne by some workers. "We need more support for workers who lose their jobs."

Trade-related job losses are concentrated in manufacturing industries where import competition is strong, including the automobile, steel, textile, apparel, computing, and electronics industries. But the loss of any manufacturing job is costly: Displaced manufacturing workers suffer an average 17 percent drop in wages when they become reemployed, said Kletzer.

"That’s a lot," she said, but the average 17 percent drop obscures two even more compelling figures: Thirty-four percent of displaced manufacturing workers earn as much or more on their new job, while 25 percent experience reemployment earnings losses of 30 percent or more.

"What I found is that some workers do okay, and an equal number just take it on the chin," said Kletzer. "So I’m saying, let’s not worry about those who do as well or better. Let’s concentrate on the ones who are suffering. This proposal fills a policy gap by helping workers after they get a new job."

The idea of wage insurance has been around for about 15 years, but Kletzer is the first economist who has analyzed displacement figures and identified the relatively small portion of workers who experience the greatest need for assistance. That finding enabled Kletzer and Litan to conclude that a wage insurance program tailored to serve those workers would cost much less than expected: If workers received 50 percent of their earnings loss, the program would cost from $2.9 billion to $3.8 billion a year depending on maximum annual assistance levels.

Key elements of the Kletzer-Litan proposal are:

• Workers would receive no benefits until they begin a new job
• Benefits could range from 30 percent to 70 percent of the total reemployment earnings loss
• Benefits would not exceed an annual cap for each worker
• To be eligible, workers must have been displaced from a full-time job they had held for a minimum of two years

Although some people oppose the proposal on the grounds that it would create a new government program, many policy makers and pundits recognize that efforts to promote free trade have stalled since massive public protests disrupted the World Trade Organization’s meeting in Seattle in December 1999.

Referring to the lost momentum on trade policy, Washington Post columnist David S. Broder wrote on Sunday, March 18, that there is "near-universal concern that the hiatus has gone on dangerously long." He went on to write that Kletzer and Litan’s proposal "hints at the kind of open-mindedness that will be needed to build broader political support for free trade." In the National Journal’s Technology Daily, a piece by William New was titled "Why Didn’t We Think of this Before?" In the April 2 Business Week, Charles J. Whalen noted the timeliness of the proposal.

Kletzer wants to broaden the scope of the discussion. "Refusing to acknowledge the costs of free trade is simply untenable," she said. "The politics of free trade require us to acknowledge that there are costs. We have to move to a more balanced dialogue."