In “What Is This 'Wage Insurance' Obama's Talking About?,” I discuss the rich history behind one of President Obama’s proposals in his final State of the Union address. Though most Americans probably haven’t heard of wage insurance, it’s an old idea with a diverse backing.
Robert LaLonde, an economist at the University of Chicago, wrote “The Case for Wage Insurance” in 2007. He argued that America’s current system of unemployment insurance isn’t enough for workers who lose high-paying jobs and can only find low-paying jobs to replace them, and workers who are older and lose their jobs to foreign trade. His argument was based on fairness. If free trade creates winners and losers, the winners should compensate the losers.
Though President Obama’s proposal for topping up the wages of workers re-hired at lower-paying jobs is new, the concept of wage insurance has a long history in the United States’ government. Since 1935, we’ve had unemployment insurance, which replaces some of the income of laid-off workers while they look for new jobs. In 1975, President Nixon signed into law the Earned Income Tax Credit (EITC), which supplements the wages of low-income workers who have dependents, indirectly subsidizing their employers. Some companies have Supplemental Unemployment Benefit Plans, which give extra income to workers who are laid off, but who the company hopes to re-hire soon, so they don’t feel compelled to find another job.
Wage Insurance isn’t without its critics. Some argue it creates moral hazard by making bad situations less undesirable. Others claim it encourages the proliferation of low-wage jobs. Still others argue it is effectively a subsidy for big corporations that don’t pay well. All have their points. It would be great if we could go without it, but for workers who need it, wage insurance can be indispensable.