Building a better safety net for workers
By ROBERT J. SHILLER
NEW HAVEN, Connecticut — A lot of public attention and worry nowadays surrounds
the new risks that globalization and information technology create for our wages and
livelihoods. But there has been far less constructive discussion of new ideas about how to
confront these risks. In fact, we might be losing the momentum we had a few years ago to
implement some of these ideas.
To be sure, we still sympathize with people who, upon reaching middle age or later, find
themselves replaced by lower-paid workers in another part of the world, if not by a
computer or a robot. But are we really going to do anything about these risks?
One new idea that seemed hot a few years ago is "wage insurance." As then
floated, the idea was simple: The government would protect people from the risk of losing
their job and being unable to find a new one at the same wage. A government insurance
program would pay these people a fraction, say, half, the difference between their old pay
and their pay in a new job for a specified period, such as two years.
The idea was first proposed by Robert Z. Lawrence and Robert Litan in their
1986 book, "Saving Free Trade," and revived in a 2001 article by Litan and Lori
Kletzer. The proposal generated interest. A demonstration program was adopted in the
United States in 2002. In 2002, the Hartz Commission recommended a version of it in
Germany. Wage-insurance programs have been actively talked about or actually implemented
in some form in Britain, France, Switzerland, and Ireland.
Despite all the intellectual applause, however, wage-insurance programs are still not a
significant force in the world economy. They should be. But they should also be
supplemented by other devices.
One advantage of wage insurance is that it may be a more effective way to subsidize
on-the-job training than traditional government-run vocational training programs. Often,
after completing a government-sponsored program, participants find it impossible to secure
a job with the promised higher pay. Far better, proponents of wage insurance argue, for
the training to be carried out by an employer who wants a job done and knows what the
employee needs to learn. It seems plausible that two years is long enough for retraining,
after which the employee might command a higher wage without a government subsidy.
But governments, fearing the expense of wage insurance if a lot of people exploit it, have
not been willing to implement it on a large scale. For example, the U.S. wage-insurance
program is confined to manufacturing workers over age 50 who are in competitively
vulnerable industries and are deemed by the Secretary of Labor to have nontransferable
skills. Moreover, the benefit is capped at Dollars 5,000 per year. The program has
practically been forgotten, and will expire next year unless it is renewed. With
government deficits the norm, that appears unlikely.
The way to regain lost momentum is to recognize that wage insurance is only one of several
new ideas for insuring the emerging risks of this century. The weakness of the current
wage-insurance proposal is that it pays benefits only for a limited period and relies for
its long-term effect on the retraining incentives that it creates.
In reality, however, losing a high-paying job may be a lifetime event, and the supposed
retraining that wage insurance would encourage for a laid-off 50-year-old worker often may
be ineffective.
In my 2003 book, "New Financial Order: Risk in the 21st Century," I proposed a
different idea, which I called "livelihood insurance." As the name implies,
livelihood insurance is designed to provide more than just a brief respite or a subsidy
for retraining. It is aimed at dealing with long-term changes in the labor market, rather
than assuring temporary wage levels. It would also rely on the market rather than a
government program.
With livelihood insurance, a private insurer would pay a stream of income to a
policyholder if an index of average income in the insured person's occupation and region
declines substantially. Moreover, this income stream would continue
for as long as the index stays down, not just for a couple of years (or any other
arbitrary period). In other words, this insurance policy would protect against lifetime
income risks.
One reason why government-run wage-insurance programs must have limited duration is that
they involve so-called moral hazard: the risk that people will get lazy or would take
easier, lower-paying jobs and continue to collect insurance that pays them the wage of a
more demanding occupation. But this would not apply to livelihood insurance, because its
benefits are tied to the rise and fall of income indexes, which are beyond the control of
individuals.
Livelihood insurance would also have another advantage. Since the premium would be
determined by the market, it would be higher in occupations that the market believes to be
in danger from outsourcing or technical change. This, in turn, would give workers a
tangible warning and an incentive to anticipate job losses before they occur.
This is not to say that wage insurance is a bad idea, or that it should not be implemented
on a wider scale. Both wage and livelihood insurance appear to have important
risk-management functions. Indeed, for the future, it is imperative to think about many
new ways, involving both government and the market, to ensure that we manage better the
greatest personal risks now faced by workers around the world.
Robert J. Shiller is professor of economics at Yale University, director at
Macro Securities Research LLC, and author of "Irrational Exuberance and The New
Financial Order: Risk in the 21st Century." |