United States | Wage insurance

Creative compensation

Insuring workers against lower wages is one of the left’s better ideas

|WASHINGTON, DC

JOSEPH SCHUMPETER knew that innovation brings some costs. The bank-teller makes way for the cash machine; e-mails push the postal service into decline. Technological advance benefits the economy as a whole by raising incomes and boosting productivity, but it harms the unfortunate few who have built careers in the destroyed industry. On January 16th President Barack Obama unveiled a proposal which seeks to even things out.

Mr Obama wants the government to provide workers with wage insurance. If a worker blamelessly loses her job and takes a new one which pays less—and less than $50,000 the government would make up half the shortfall for two years, up to a total of $10,000. An estimate from 2007 suggests this would cost $3 billion-4 billion a year. That means it could be financed with a tax, which supporters would describe as an insurance premium, of around $25 per year, per worker. The proposal is likely to remain theoretical for the foreseeable future; it has few takers among Republicans, who control Congress and therefore the budget. Yet as an example of how the American left is thinking about how to respond to globalisation and automation it is worth examining, not least because whomever the Democrats nominate as a presidential candidate in July is likely to borrow it.

The government already offers the same terms to workers over 50 who lose their jobs as a result of foreign competition. The logic of this proposal is the same: trade benefits all consumers by filling shops with cheap imports, but harms those whose jobs disappear overseas. Why, ask advocates of wage insurance, should this apply only to trade-related job losses? Is a factory worker replaced by a robot any less deserving than one who is displaced by foreign goods?

The costs of having to switch careers can be severe, because employees lose seniority and firm-specific skills, such as how to use particular tools or software. From 2011 to 2013, 4.3m workers were displaced from jobs they had held for at least three years. Three in five found a job by January 2014; of those, over 20% lost more than a fifth of their income. Transport and utilities workers were hardest hit; 40% of those who found jobs faced losing a big chunk of their income.

If the wage loss persists over a career, it can total hundreds of thousands of dollars. But whereas Americans can insure themselves against other catastrophes, like a fire or a burglary, they cannot do so against a robot taking their job. That is probably the result of adverse selection: workers in industries where machines are on the march will be especially keen to buy insurance, while those who feel safe will steer clear, leaving insurers with only bad risks.

Some firms offer top-ups to state-provided unemployment insurance, which is paid during episodes of joblessness. But whereas the government can offer a flat rate, by requiring everyone to participate, premiums in the private market vary with risk. According to IncomeAssure.com, insuring 50% of a $50,000 income sets back a government administrator in Texas less than $2 per month; the same coverage costs a construction worker in Mississippi $76 a month. It does not help that unemployment insurance varies wildly across states—something else Mr Obama would like to change.

The White House claims that wage insurance would encourage workers to find new jobs quickly, because the insurance payments are limited to two years, and kick in only once the person finds a new job; every month they are out of work is a month they miss out on both wages and wage insurance. A pilot programme in Canada in the 1990s, a rare example of a similar policy in another country, found that insurance increased the proportion of displaced workers finding jobs within six months by four percentage points. Average earnings fell by 5%, though—presumably because insured workers were less likely to hold out for a higher-paying job.

As a response to worries about robots, apps and immigrants competing away middle-class jobs, wage insurance makes more sense than, say, trade barriers or a steeply higher minimum wage. One benefit of the policy is that once suitably insured, workers might be less inclined to oppose economic liberalisation.

This article appeared in the United States section of the print edition under the headline "Creative compensation"

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