New York Fed paper argues for wage insurance

US workers should have wage insurance to compensate them if they transition to lower-paying roles, a Federal Reserve Bank of New York report argues.

“Wage insurance provides income support to displaced workers who find re-employment at a lower wage,” Benjamin Hyman, Brian Kovak and Adam Leive say in the report.  “Because the subsidy amount is proportional to the earnings decline, the policy is designed to shorten unemployment durations by making re-employment more attractive, particularly in lower-wage jobs.”

Eligibility for wage insurance increases short-run employment and long-run cumulative earnings, the authors say. The policy increases long-term earnings by making periods of unemployment shorter.  

“The programme is self-financing even under conservative assumptions,” they write. “While standard policies like unemployment insurance temporarily cushion the impacts of job loss, and retraining can help some workers re-skill, in many cases these policies have proven insufficient at compensating workers whose livelihoods are lost.”

Technological changes like decarbonisation and artificial intelligence necessitate policies to protect workers’ earnings. But the authors warn wage insurance could lead to worse job matches and lower compensation after benefits expire despite the intention to protect workers for whom retraining is unavailable or ineffective.

They studied the Trade Adjustment Assistance programme that compensates workers with wage insurance who lose employment to international trade.

“Wage insurance eligibility increases employment probabilities by eight to 17 percentage points during the two years following displacement,” they find. “Programme eligibility also increases earnings replacement rates by 10 percentage points and cumulative earnings by over $18,000 during the four years following displacement.”