Sunday, June 05, 2005

Wage Insurance Program

There are many instances when I have wondered what happens to workers who are displaced from their jobs by the effects of modern economic systems - globalization, free-trade, outsourcing, offshoring, innovation - while the economy gains overall. Although it is superficially mentioned in the media and elsewhere that the government takes responsibility in trying to compensate, re-train and re-employ the displaced workers, I have never understood the specifics.

Brookings Intitution's draft titled 'A Fairer Deal for America's Workers in a New Era of Outsourcing' (Lael Brainard, Robert E. Litan and Nicolas Warren) proposes a wage insurane program for workers displaced from their work permanently (in a market where offshoring accelerates the pace at which workers' investments in job-specific skills lose value). The authors feel that this scheme would aid in rapid reemployment and insure wages, and not just unemployment, in the present scenario. They also propose the program should be publicly mandated rather than being managed by private provisions.

From what I understood..

What is wage insurance?
Since the Great Depression, America has recognized the need for collective responsibility to help those who, through no fault of their own, may be thrown out of a job. Hence was formed the federally mandated unemployment insurance (UI), which replaces the displaced workers' previous wage for 26 weeks. Since 1962, the social contract has included special protections for those displaced by trade, including extended unemployment insurance and retraining benefits under the name of Trade Adjustment Assistance (TAA).

Problems with wage insurance programs?
Although both these are reformed on a regular basis, number of displaced workers who have really benefitted has been low primarily because of two factors:
a. problems with eligibility requirements for coverage,
b. effectiveness of the training program.

Performance in practice of different existing programs?
1. Earned Income Tax Credit program
++ higher labor participation among low-income workers
++ movement of several million households out of poverty
2. Targeted Jobs Tax Credit program
-- low participation rates among skilled labor due to stigma and reluctance to self-identify as member of targeted population
-- burdensome certifications and eligibility requirements
3. New Jobs Tax Credit program
4. Work Oppurtunity Tax Credit program
5. Welfare to Work Tax Credit program

A few notes..
- surge in public anxiety due to offshoring and loss of white-collar jobs
- America is going through a period where job creation is relatively low compared to job destruction
- there is a decline in the proportion of national income going to compensation of employees
- process of 'creative destruction': change should not just be tolerated but nurtured and firms should at some point pass the market shrink test (going out of business and destroying livelihoods of employees and owners)

Brookings Trade Forum 2005 is a good place to find papers on current research on the offshoring subject.


Post a Comment

<< Home