A Prescription to Relieve Worker Anxiety

Lori G. Kletzer is a visiting fellow at the Institute for International Economics and an associate professor of Economics at the University of California, Santa Cruz. Robert E. Litan is vice president and director of the Economic Studies Program at the Brookings Institution, where he also holds the Cabot Family Chair in Economics. The authors thank Samara Potter for her invaluable research assistance and C. Fred Bergsten, Gary Burtless, Catherine L. Mann, J. David Richardson, and Charles Schultze for their comments on this brief's earlier drafts. This policy is being simultaneously published by the Institute for International Economics and the Brookings Institution.

With the sharp slowing of the US economy, worker anxiety is back in the news. But even during healthy economic times such as the late 1990s, workers feared layoffs and general job instability. The failure of Congress to approve fast-track trade negotiating authority in 1997 strongly suggests that no American president will be successful in persuading Congress and the American people to accept further trade liberalization until additional measures, aimed specifically at easing the pain of worker dislocations and encouraging rapid reemployment, are embraced by federal policymakers. In this brief, we outline and present cost estimates for two such proposals: wage insurance for qualifying displaced workers upon reemployment, and subsidies for health insurance for qualifying unemployed displaced workers. Both programs would provide benefits to full-time workers who have been dislocated, for any reason, from jobs they have held for at least two years.

Americans have been bombarded by media coverage of the slowing US economy. During the last 3 months of 2000, the economy generated an average of 46,000 new jobs per month, a pace much slower than the average monthly gain of 187,000 jobs for the first 9 months of 2000 (and 229,000 new jobs per month average for all of 1999). The unemployment rate rose to 4.2 percent for January 2001 from 4 percent for December 2000, and with layoffs expected to increase in the coming months, the unemployment rate may move beyond 4.5 percent, and perhaps to as high as 5 percent later this year.

Widespread job loss
leads to feelings of uncertainty
and insecurity among
jobholders, especially older
workers who typically
suffer larger income
losses when displaced.

In fact, many workers have been anxious about losing their jobs even during the high points of the record expansion of the 1990s, and for good reason. Despite the low overall level of unemployment throughout this period, job loss and turnover in the labor markets have been prevalent. For many workers, job loss imposes substantial costs, not only during spells of unemployment but also afterwards, if they are forced to take a cut in pay in their new jobs.

The relatively high level of job turnover in the US economy-among the highest in the world-has its benefits. Flexible labor markets facilitate the rapid redeployment of labor to sectors such as high-tech, where it is highly valued and much in demand. Young workers benefit from easy turnover, as they gain experience and skills and find better matches with employers.

But labor market churning has its downsides as well. Widespread job loss leads to feelings of uncertainty and insecurity among jobholders, especially older workers who typically suffer larger income losses when displaced. Nervous workers have less reason to show loyalty to firms and morale suffers when workers fear they might be readily laid off. For similar reasons, many Americans are hesitant about government efforts to further reduce trade barriers, which they believe places American jobs (and wages) at risk. In a recent poll conducted by the Pew Research Center for People and the Press, 78 percent of respondents answered that "protecting the jobs of American workers" should have top priority in deciding US policies about trading with other countries.

We propose two benefit
programs: 1) wage insurance and
2) subsidies for health insurance
for qualifying displaced
workers upon reemployment.

Continued worker anxiety clearly was one of the reasons why, even in the midst of a record-setting economic expansion, the Clinton administration failed in its 1997 and 1998 efforts to convince Congress to give the president "fast-track" trade negotiating authority. Among other factors, worker anxiety fueled the protests against the World Trade Organization in Seattle in 1999 and against the International Monetary Fund and the World Bank in Washington, DC, and Prague in 2000. Job insecurity helps explain the political resonance of organized labor's insistence that any new trade agreements with less developed countries contain certain guaranteed or enhanced "labor standards." More broadly, fears of job loss account for surveys showing weak public commitment to further liberalization of barriers to foreign trade and investment.¹

The Bush administration has signaled that it wants to reach new trade agreements-in large part because other nations will form trade blocs among themselves if the United States does not push the liberalization agenda. But the current economic slowdown will make it more difficult than ever to achieve success on the trade front. Also, an anxious electorate may be less likely to embrace the kind of market-oriented policies that require entitlement reform.

Looser monetary policy by the Federal Reserve over the next few months should dampen the severity of the slowdown and thus reduce the nervousness among workers. But as the continued worker anxiety of the 1990s has demonstrated, in an increasingly global economy good times are not enough to ease worker concerns that competition from abroad threatens their jobs or their wages. Economic argument and evidence are not likely to reduce worker concerns either, despite the widespread conclusion that trade ranks behind technological change and immigration as a source of job loss and declining real wages of less-educated workers. Without strong public support, it is unlikely that sufficient political support (or domestic consensus) can be built for restarting dialogue on trade liberalization and open markets, which is why federal policymakers should aim to implement programs that address worker anxiety and encourage rapid reemployment.

Accordingly, we propose here two benefit programs that would do precisely that: 1) wage insurance and 2) subsidies for health insurance for qualifying displaced workers upon reemployment. At recent levels of unemployment, the total annual cost of these two programs is projected at roughly $3 billion to $3.5 billion, even if the unemployment rate should rise to the 5 percent range. In our view, the economic and political benefits that these programs promise are well above the costs, and such costs are readily affordable, given sizeable projected federal surpluses.

Even in Good Times, Workers Have Had Reasons to Be Anxious

Data from the Mass Layoff Statistics (MLS) program, a joint project of the Bureau of Labor Statistics (BLS) and state employment security agencies, reveal a considerable amount of job loss throughout the economy, even during this record expansion. The MLS program counts as a mass layoff a job loss action associated with 50 or more worker claims against an establishment's unemployment insurance account during a 5-week period.

In 1999, 1.15 million workers lost their jobs through mass layoffs, down only a fraction from the 1.18 million total in 1996. Given the drop in the unemployment rate from a 5.4 percent annual average for 1996 to 4.2 percent for 1999, the level of mass layoffs remains stubbornly high. The same is true for permanent layoffs (excluding the end of seasonal or temporary jobs), which numbered about one-half million in both 1999 and 1996.² The fact that job turnover remains high despite the low national unemployment rate gives many workers ample reason to be anxious about job security despite the strong economy.

Trade liberalization is often the
focal point for anxiety about job
insecurity, and job loss is costly
for workers displaced from
manufacturing industries where
import competition is strong.

Not surprisingly, less-educated workers have faced the highest risk of losing a job, although their rate of job loss (12 percent) in the hot job market of the late 1990s was not much different from the late 1980s, also a period of healthy demand for labor. However, job loss rates among workers with higher levels of education increased in the early 1990s and by 1997-99 stood at nearly 7 percent, as compared with 5.4 percent for 1987-89.³

Losing a job is a traumatic experience. Workers not only lose income when they are unemployed, but many often suffer a drop in their earnings after finding new jobs.⁴ Older workers-who tend to be less flexible adapting to new production techniques or who lack the educational background to transfer to well-paid service economy jobs-bear the greatest losses. According to the February 1998 Displaced Worker Survey, workers aged 45 to 64 years experienced earnings losses averaging 12 percent. In contrast, workers aged 25 to 34 years actually increased their earnings, on average, by 5.5 percent after losing a job.⁵

Trade liberalization is often a focal point for anxiety about job insecurity, and job loss is costly for workers displaced from manufacturing industries where import competition is strong: on average, weekly earnings on the new job are about 17 percent lower than on the old job. However, this large average loss masks considerable variation: 34 percent of displaced workers in these industries report earning the same or more post-displacement as they earned before the job loss, while 25 percent reported earnings losses of 30 percent or more. These earnings losses are large, but it is critically important to note that they are not much different from the average earnings losses for all displaced manufacturing workers (16 percent).⁶

Job displacement can result from a number of factors: technological change, downsizing, restructuring, changes in consumer demand, and changes in public policy (trade liberalization and environmental regulation are two examples). Yet one of the most important findings of recent research is that for most displaced manufacturing workers, what matters is the kind of job lost and the kind of job regained, not why the job was lost. If workers and consequences are alike among the various causes of job loss including increasing foreign competition, technological change, and downsizing, then policymakers need to consider adjustment policy for all displaced workers, not just those displaced by trade.

Compensating Unemployed Workers

Aside from their own assets and other family members' earnings, unemployed workers currently have one primary source of income to tide them over until they find a new job: unemployment insurance (UI). Unemployment insurance, introduced in 1935 as part of the Social Security Act during the second wave of New Deal legislation, is an essential federal policy tool that serves two crucial functions. First, it cushions the economic losses suffered by workers who are laid off through no fault of their own. Second, the significant jump in compensation payments during a recession acts as an automatic fiscal stabilizer, helping to sustain aggregate consumption-and the overall economy-when joblessness increases.

Since 1974, UI has been supplemented for eligible workers for whom it can be documented that increasing imports have contributed importantly to their displacement. Under the most recent version of the Trade Adjustment Assistance (TAA) Act, qualified workers may gain an additional 52 weeks of UI payments, provided they are enrolled in an approved training program. A similar program, the North American Free Trade Agreement Transitional Adjustment Assistance (NAFTA-TAA) program, was created in 1993. For eligibility, workers must prove that they lost their job because of increased imports from, or a shift in production to, either Canada or Mexico. The UI, TAA, and NAFTA-TAA programs are administered by state unemployment offices.

The federal government makes a modest contribution to fund UI (states bear the rest of the cost) and pays all of the expenses associated with TAA and NAFTA-TAA. In the last half of the 1990s-as the unemployment rate drifted down from about 5.5 percent to roughly 4 percent-total UI benefit payments have been generally stable at about $20 billion per year. TAA and NAFTA-TAA payments have been far lower, generally less than $300 million annually.⁷

Not everyone who is counted as unemployed qualifies for UI: only those who are laid off or otherwise involuntarily released from their job can receive unemployment compensation. These workers account for only about 45 percent of the unemployed. The rest of the people whom the Labor Department classifies as unemployed include those who are between jobs voluntarily (in recent years about 10-15 percent of the total) and those just entering or reentering the labor market as new jobseekers (40-45 percent of the unemployed). The share of workers who qualify for TAA and NAFTA-TAA is far lower.

The existing safety net for replacing the lost income of displaced workers has a number of holes, which aggravate workers' anxiety about the prospect of losing their jobs. Perhaps most important, the payments under UI are limited, generally replacing a little less than 50 percent of the average worker's previous salary.

[Trade Adjustment Assistance]
fails to address the most critical
component of worker costs: earnings
losses after reemployment.

In 1999, the average weekly earnings of a production worker in wage and salary employment was $457 while the average weekly unemployment check was $212.⁸ Most eligible workers receive payments for just 6 months. Fortunately, this eligibility period is longer than the average spell of unemployment, which has been between 3 and 4 months over the past 5 years. However, the compensation payments do not help workers who suffer a loss in earnings after they take a new job. Moreover, although all laid-off workers now have the right to purchase unsubsidized health insurance from their former employer if it was offered when they were employed, many jobless workers cannot take advantage of this guarantee. The loss of income during unemployment spells and the high cost of premiums mean that many workers have a tough time purchasing health insurance while continuing to put food on the table, pay rent or utilities, finance a mortgage, and pay for other costs of daily living.

Workers who receive additional compensation under TAA must be enrolled in an approved training program. The evidence that these training programs are useful is weak, at best, and understandably so. Workers have no guarantees of employment when they finish the training programs. For this reason, there is broad consensus that the best training is delivered on the job, or if workers are already at a job, then in supplemental programs that workers help pay for themselves and choose to attend at night or other off-hours.

A New Safety Net for Displaced Workers

There is a better way to provide a safety net to displaced workers-regardless of the reason for their job loss-and, at the same time, encourage workers to accept new employment offers more rapidly and to gain the training they need at their new jobs. This strengthened safety net should help reduce workers' anxieties about losing their current jobs, and thus diminish worker opposition to further trade liberalization that promises lower prices and broader product choice that benefits society as a whole.

Our proposal has two components: 1) an offer of "wage insurance" upon reemployment, and 2) subsidies for medical insurance, in lieu of the current TAA (whose benefits Congress may nonetheless be willing to offer as an option to the compensation we have suggested). In either case, workers would still be eligible to collect unemployment insurance if they otherwise qualify.

To qualify for our proposed supplemental wage insurance benefit, workers need only document that they have been "displaced" according to criteria similar to the operational definition of displacement used by the BLS in its Displaced Worker Surveys (plant or company closed or moved, elimination of position or shift, insufficient work); that they had served at their previous job for a minimum period of time-we suggest two years; and that they have suffered an earnings loss (from old job to new job) that can be documented through state unemployment insurance offices and employer quarterly earnings withholding reports. A broader population would be eligible for our proposed health insurance subsidy: all full-time displaced workers would receive the subsidy, for up to 6 months, or until they found a new job (whichever is earlier). To prevent job churning, workers could be limited to receiving the subsidy no more frequently than once during any 3- to 4-year period.

Wage insurance would work as follows: eligible workers would receive some fraction of their wage loss-which could vary by age and tenure of the worker-for up to 2 years following the initial date of job loss, but would begin to be paid only when workers found a new job. The payments would be administered through state UI. In the cost estimates we show here, we have assumed that the average payment is 50 percent of the earnings loss, and is provided only for workers whose previous and new jobs were full-time (benefits could be extended to workers reemployed in part-time jobs, with payments adjusted on an hourly basis). For example, a displaced worker who once earned $40,000 and found a new job paying just $30,000 would receive $5,000 (in quarterly payments) until 2 years after the initial layoff. We also recommend that the annual payments should be capped, perhaps at something like $10,000. Our plan would be available to all qualifying displaced workers, not just those displaced by trade.

Table 1 provides estimates of the numbers of reemployed displaced workers who would have qualified for both the wage insurance and health insurance benefits under our proposed program, during 1997 and 1999, based on the Displaced Worker Surveys for those years. The table shows that of displaced workers reemployed full-time, approximately 20 percent would have had at least 2 years' tenure on their previous job and suffered a wage loss in taking new employment (many more workers actually obtained a job that paid more than the previous job).

Table 2 reports the estimated budgetary cost for compensating the qualified workers estimated in Table 1, again for both 1997 and 1999. Assuming a 50 percent replacement and subsidy rate, the table indicates that our wage insurance and health insurance program would have cost about $2.9 billion in 1999, when the national unemployment rate averaged 4.2 percent. The total cost of the two programs would have been $3.6 billion in 1997 when the national unemployment rate was 4.9 percent. Total costs would increase by about $200 million each year if workers reemployed part-time continue to receive health insurance benefits.

Given the recent and expected slowdown in overall economic activity, this last number is close to the possible average for 2001, assuming that the unemployment rate actually averages 4.9 percent this year, which now seems a bit high (technically, the current dollar cost would be approximately 10 percent higher than 1997 due to inflation). The health insurance program would be considerably more expensive if extended to all workers eligible for UI rather than just "displaced" workers.

We believe several arguments support the kind of extended safety net we have outlined. One is that the program addresses real needs that many workers have, whether they are currently displaced or fear future displacement. Second, the structure of the program-which triggers the benefits only when workers obtain new employment-contains incentives for workers to accept new jobs more quickly, and in a broader scope, than they do now. Third, the program in effect subsidizes retraining on the job, where it is likely to be far more useful than in a training program where reemployment prospects are uncertain.

Finally, reducing worker anxiety should reduce worker opposition to trade liberalization and globalization more broadly. There is ample evidence that opinions become more favorable toward trade liberalization when it is linked to worker adjustment assistance.⁹ For example, a recent survey by the Program on International Policy Attitudes reports that roughly two-thirds of the respondents agreed with the statement, "I favor free trade, and I believe it is necessary for the government to have programs to help workers who lose their jobs"; only 18 percent advocated free trade in the absence of such help.¹⁰ This view about worker assistance is also reflected in the findings the Trade Deficit Review Commission reported in late 2000. The Commission could not agree on anything about the trade deficit-including what causes it and how to remedy it-but did agree on exploring a wage insurance program for displaced workers as a way of mitigating opposition to trade liberalization.

Objections to our suggested programs can be easily met. The total cost, less than $4 billion, might have been a major obstacle when federal deficits were high and growing but is not a problem now, and in any event would be small in relation to the more than $20 billion that is now spent on unemployment insurance, as well as to the tax cuts that are being contemplated for many upper income Americans. Furthermore, these costs are a tiny fraction of the $500 billion in estimated benefits for the United States from freer trade.¹¹

Some economists have suggested that wage insurance in particular creates a "moral hazard" for employers, encouraging them to pay less because they know that workers will be partially compensated by the federal government. We do not believe this effect is likely to be significant given the large numbers of new entrants into the labor force who do not receive these benefits, coupled with unemployed workers who do not qualify for the program. The United States has a large labor market where wages are set by overall supply and demand.

Conclusion: Government Support for Workers

Trade Adjustment Assistance, up for renewal or extension this year, can no longer be the centerpiece of displaced worker adjustment policy. Critics of TAA can be found across the political spectrum, because the program does not work. It fails to address the most critical component of worker costs: earnings losses after reemployment. It also works as a disincentive to rapid reemployment.

Our proposal focuses on reemployment while acknowledging and helping to mitigate the losses in earnings that workers experience when they lose a job for reasons unrelated to their own performance. Wage insurance, in particular, should encourage workers to be reemployed rapidly while improving their access to on-the-job training.

Free trade and open markets play important roles in facilitating economic growth while restraining inflation. But open engagement with the world does not help everyone. The government must offer real help to workers who are hurt in the process. Political leaders should not be surprised to find that public support for further trade liberalization is weak until that help arrives.

Table 1: Displaced workers in the late 1990s

	1997	1999
Unemployment rate, average for the year	4.9 percent	4.2 percent
Displaced workers	8,521,883	8,005,659
Workers displaced from full-time jobs	6,416,460	6,280,796
Reemployed displaced workers	5,212,776	4,958,590
Reemployed displaced workers (full-time)	3,694,375	3,647,698
Displaced workers eligible for wage insurance	797,240	651,391
Workers ineligible for wage insurance
Reemployed but less than 2 years job tenure on old job	1,383,465	1,509,891
New job earnings greater than or equal to old job earnings	1,327,798	1,308,893
Other1	185,873	177,523
Mean annual earnings loss of qualified participants2	$8,862	$7,513
Mean annual earnings on old job of qualified participants	$39,526	$42,334

1. Other for 1997: Respondents with four or more jobs since displacement or no response to number of jobs held: 111,179. No reported earnings, wasn't working in last year: 12,568. New job after end of 1997: 62,126. Other for 1998: Respondents with four or more jobs since displacement or no response to number of jobs held: 102,455. No reported earnings, wasn't working in last year: 0. New job after end of 1999: 75,068.
2. Due to lower earnings on new job. This estimate does not include income loss due to unemployment.

Source: Authors' calculations from 1998 and 2000 Displaced Worker Surveys, supplements to the February Current Population Survey. Estimates are in current year dollars.

Table 2: Displaces Worker Wage Insurance Program, Annual Cost Estimates

	Amount of benefit (in billions of current dollars)
	30 percent	50 percent	70 percent
1997
Wage Insurance Benefit (capped at $10,000)	2.04	2.96	3.63
Wage Insurance Benefit (capped at $20,000)	2.22	3.49	4.62
Wage Insurance Benefit (not capped)	2.28	3.79	5.31
Health Insurance Benefit1	.48	.79	1.11
1999
Wage Insurance Benefit (capped at $10,000)	1.53	2.26	2.81
Wage Insurance Benefit (capped at $20,000)	1.67	2.63	3.47
Wage Insurance Benefit (not capped)	1.76	2.94	4.11
Health Insurance Benefit1	.45	.74	1.04

1. Workers who are displaced from full-time jobs, regardless of tenure on old job, receive health benefits equal to a percentage of the average health premium paid by employers for a 6-month period following displacement. If workers are reemployed within the 6-month period the health benefit ends on their date of reemployment.

Source: Authors' calculations from 1998 and 2000 Displaced Worker Surveys, supplements to the February

Current Population Survey. Estimates are in current year dollars.

Notes

1. Scheve, Kenneth F. and Matthew J. Slaughter, Globalization and the Perceptions of American Workers, Institute for International Economics, March 2001.

2. Hyson, Rosemary and James R Spletzer, 2001. "Large-scale Layoffs, Employment Dynamics and Firm Survival," Bureau of Labor Statistics working paper, January.

3. Farber, Henry S., "Job Loss in the United States, 1981-99," Industrial Relations Section, Princeton University, 2001.

4. Many displaced workers experience a decline in earnings before their job loss. Jacobson, Louis, Robert LaLonde and Daniel Sullivan, The Costs of Worker Dislocation, W.E. Upjohn Institute for Employment Research, 1993.

5. Hipple, Steve, 1999. "Worker Displacement in the mid-1990s," Monthly Labor Review, July, pp. 15-32. These averages were calculated for workers who had three or more years of tenure when they were displaced from a full-time job during 1995-96 and who were reemployed in a full-time job in February 1998.

6. Kletzer, Lori G., What are the costs of job loss from import-competing industries? Institute for International Economics, forthcoming 2001.

7. Storey, James R., 1999, "Trade Adjustment Insurance for Workers: Proposals for Renewal and Reform," Congressional Research Service Issue Brief No. 98023 (May 23) and U.S. General Accounting Office, 2000, "Trade Adjustment Assistance: Trends, Outcomes, and Management Issues in Dislocated Worker Programs," GAO-01-59, October.

8. Economic Report of the President (January 2001), Tables B-45 and B-47.

9. Scheve, Kenneth F. and Matthew J. Slaughter, Globalization and the Perceptions of American Workers, Institute for International Economics, March 2001.

10. Kull, Steven. 2000. Americans on Globalization: A Study of U.S. Public Attitudes, Program on International Policy Attitudes, March 28.

11. This estimated increase in US economic welfare assumes global free trade, with all post-Uruguay Round trade barriers completely removed. See Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, "CGE Modeling and Analysis of Multilateral and Regional Negotiating Options," in R.M. Stern, ed., Issues and Options for U.S.-Japan Trade Policies. Ann Arbor: University of Michigan Press, forthcoming 2001.