The Early-Warning Economy

The time to think about helping displaced workers is before they lose their jobs.

By Gene Sperling

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Do many Americans, the benefits and burdens of a fast-paced global economy may seem like tropical weather. It is generally enjoyable for those who bask in it, but when the torrid winds of change flatten your community, your dreams, and even your sense of economic dignity, the costs can seem absolutely brutal.

While we as a nation are committed to taking preventative steps to detect and warn communities threatened by natural disaster—and to share in the rebuilding process when havoc is wreaked—when it comes to auto workers, as well as whole swaths of the textile manufacturers or computer programmers, threatened by the high winds of global competition, we do pathetically little to take preemptive steps or to offer serious assistance to those who have seen their economic livelihoods leveled. Even when we can see years in advance that certain workers and communities will be vulnerable, the only options we offer them are either last-minute trade protectionism or economic devastation with a sprinkling of ad-hoc, confusing adjustment assistance. If we want to maintain public support for vigorous competition, innovation, and open markets to raise the economic tide, it is becoming increasingly clear that we need a new cost-sharing compact to help lift up the boats that are sinking.

The need for a new direction has never been greater. The face of economic anxiety about job loss is far more diverse than even a decade ago. Fear of dislocation due to global competition used to be largely the province of factory workers in communities dependent on a single manufacturing industry. Today, large parts of the white-collar community—from travel agents to software engineers—feel that same fear. But in addition, these worries are growing deeper. For many workers, the biggest concern is not simply the temporary depression of losing a job and the weeks of inconvenience and financial stress. Instead, their anxiety is often a fear of falling: the dread that a plant closing, outsourcing, or restructuring will force workers to take jobs with substantially lower pay, resulting in a permanent lowering of their standard of living and a knock to their sense of economic dignity.

These fears are not unfounded. Nearly half of workers displaced between 2001 and 2003 who found new full-time work by February 2004 agreed to take lower pay, according to the Department of Labor's Displaced Worker Survey. A recent study by Princeton professor Henry Farber found that as a group, these workers faced a 17 percent decline in wages due to displacement, more than double the 7.8 percent decline similar workers experienced between 1997 and 1999. Perhaps even more troubling, as family finances have become more volatile, the median decline in income for families that do fall has increased from about 25 percent in the 1970s to more than 40 percent today, according to research by Yale professor Jacob Hacker and Nigar Nargis of the University of Dhaka.

While we can only hope that these trends are temporary, this rational economic anxiety creates both risks and opportunity for policy. With more workers questioning the benefits of globalization, technological advance, and open markets, the constituency for self-defeating protectionism could grow. At the same time, if directed properly, these concerns could boost support for bolder, more effective policies for dealing with job loss, giving workers dislodged by global competition second and third chances at upward economic mobility, and ensuring that job loss—while always painful—need not devastate a family's standard of living.


Preempting burial insurance

It's not hard to understand why some politicians have been reluctant to rally to the cause of hammering out policies that deal with the consequences of job dislocation. Most workers, after all, want to hear about how to save their jobs—not what to do after they lose them. During the 2004 Democratic presidential primary, I was asked to join an initial conference call on policy issues for Gen. Wesley Clark. After listening to him, I commented to his policy director, Jason Furman, that it was refreshing to hear a politician so interested in retraining policies. Most candidates, I told Jason, usually complained that audiences said they didn't want to hear about "burial insurance." On the very next call, the general immediately asked me to guess the response he got when he spoke to workers about retraining. "Burial insurance," he said. "They called it burial insurance."

Indeed, a major shortcoming of our current adjustment policy is that it is almost entirely reactive. Virtually all adjustment assistance is triggered only after one loses a job or a factory closes down. It's no wonder workers see retraining as "burial insurance"—it's only about what help one can get after one's job has been given last rites.

One way to make the system more preemptive and empower individuals to take control of their own career paths would be to establish Flexible Education Accounts. These accounts would be a new and improved version of the Lifetime Learning Tax Credit (LLTC), passed by President Bill Clinton. The LLTC—which provides an annual tax credit of 20 percent on up to $10,000 in expenses—was an important recognition of the need for continual learning in the new economy. Yet, even though I was part of the team that crafted the LLTC, it is clear to me that covering a small fraction of education costs each and every year is not necessarily the right solution for workers who need substantial new education or training. Most workers need, in our increasingly dynamic economy, not a little help each year, but significant help once or twice a decade when they face a dislocation or the need to upgrade their skills.

Flexible Education Accounts would provide a 50-percent tax credit on up to $15,000 per decade. By allowing people to apply the entire tax credit in one single year or over a few years of intensive education, the program offers workers a large portion of education or training costs when workers need it most—whether they have lost a job, hope to get a promotion, plan on changing careers, or want to learn new skills to start their own businesses. Just as importantly, Flexible Education Accounts would give workers something they lack now: a preemptive option that provides them assistance not only after they've been laid-off, but also whenever they feel their job may be at risk or decide they need to change fields. We should also pursue a more robust, preemptive agenda of business incentives, wage credits, and early-warning teams to aid communities at the point it is clear they are under siege—and not only after the factory doors have been nailed shut.


One-stop shopping

Once job loss does take place, we also need to make the aftermath less scary and overwhelming for workers. Every American knows where to order pizza, a DVD, or Chinese food, and yet few have the slightest idea of where to go—or know what is available to them—when they lose a job. About 40 percent of unemployed Americans receive assistance through Unemployment Insurance. But outside of that program, most Americans have little sense of what their options are during what is often an extremely disorienting and frightening experience.

One reason for the confusion is that in order to keep costs low, adjustment initiatives often restrict eligibility in ways that are confusing and out of touch with current economic reality. For example, only those workers who lose jobs due to trade can access the most significant training assistance. That means that although millions lost jobs or faced long-term unemployment last year, only about 150,000 workers received Trade Adjustment Assistance (TAA). It is simply nonsensical to extend special benefits to this small group when job loss due to technological change or domestic competition is just as painful, and as it becomes increasingly more difficult to even determine the exact cause of job loss. Our adjustment assistance system will never be simple, accessible, and universal as long as arbitrary distinctions determine who can or cannot get the help everyone deserves.

Moreover, in a world where Target, Costco, and Wal-Mart compete to satisfy every consumer need with a single park of the car, we should have true one-stop shops for helping workers through hard economic times. The 1998 Workforce Investment Act—which first introduced one-stop shop for workforce development was a good step—but we need to move toward a system where a worker can apply for unemployment insurance, retraining, health and even mortgage insurance, all in one place. Under our current system, however, unemployment offices and worker retraining centers are rarely in the same building. We need to establish centers that focus on service, helping workers cut through various government bureaucracies and empowering people to make choices that work for them by helping them explore and understand their options with guidance from trained professionals.


Fear of falling

Certainly, the ideal way to deal with job dislocation is to give workers an opportunity to prepare for job changes before they happen and to make the transition as smooth and unthreatening as possible. But once workers have lost their jobs, we need a way to help them avoid debilitating economic losses while at the same time providing incentives for them to reenter the labor force. The most promising way to accomplish this is wage insurance.

Under a basic 50-percent wage-insurance program, dislocated workers who find new work would receive 50 percent of the difference between their new wage and the wage in the job they lost if it paid more. If a worker took a one-third pay cut—say, from $30 to $20 an hour—wage insurance would bring their hourly earnings up to $25, recovering half of the $10 gap between their old and new pay.

This design empowers workers directly and encourages work. Wage insurance that replaced all of an individual's lost wages or kicked in before she found a new job could provide a disincentive to jump back into the workforce. But because the protection is triggered only when a worker finds a new job—and because the worker will always be better off with a higher wage—she will have a strong incentive to find both another job and the highest wage possible.

Economists Robert Litan and Lori Kletzer have led the charge in calling for wage insurance in the United States, but so far the government has made little progress towards providing this kind of protection. In 2002, Congress created a small wage insurance pilot program within TAA. Under this program, workers can opt to forgo most TAA benefits—including training assistance—and instead take 50-percent wage insurance, covering half of lost wages for up to two years. But the program is too limited. Only the few workers who can prove they lost their job because of trade are eligible—and even amongst that small group, only those over the age of 50 and making less than $50,000 can receive the insurance benefit. In 2003, only 42 workers even used the program.

Fortunately, there are ways to structure wage insurance that would make it meaningful for all American workers and flexible enough to accommodate whatever fields become threatened in future job markets.

Since the last thing we need is another adjustment program linked to trade or that turns on how a worker lost their job, any displaced worker who has held their job for two years should qualify regardless of the cause of their job loss. Similarly, while the 52-year-old worker who lacks a college education and has few transferable skills may be in the greatest need of wage insurance, we know that the 37-year-old laid-off father of four faces significant financial stress even if he ultimately will have greater opportunities to build a new career. One solution is to make wage insurance apply to workers in their late-30s and 40s as well as their 50s, but to make the length of wage insurance longer for older workers. While those below 50 might be eligible for only one or two years of protection, it would be extended significantly longer for those older than 50 to help work new jobs without serious distress until they are closer to becoming eligible for early Social-Security benefits.

Any serious wage-insurance program must also eliminate the absurd current requirement that workers forgo retraining assistance in order to receive insurance benefits. Unless policy-makers see wage insurance as a permanent solution to falling wages for dislocated workers, such initiatives should not discourage the new education that might lead to a higher-wage job.

We should also consider new ways to extend wage insurance to more workers or allow them to opt for greater protection. According to McKinsey Global Institute, companies exploring offshore outsourcing to cut costs could offer generous wage insurance to full-time employees for less than 5 percent of the savings companies realized from outsourcing. The government could provide financial incentives to encourage employers to offer these plans. Because payouts would be time-limited, there would be little risk that companies would be saddled with long-term legacy costs.

Finally, because broader coverage of wage insurance would mean higher costs, we should experiment with pilot programs that offered workers the voluntary option of paying a small premium to receive extensive wage insurance. While such an optional program runs the risk of drawing only the most vulnerable workers with the spreading of economic anxiety, chances are such an option could be popular with a broad spectrum of workers.


Pro-growth, pro-worker

Despite a fragile job market and the increasing pace of globalization, American workers are still largely on their own when it comes to coping with—and rebounding from—job loss. The main impediment to progress on a substantial upgrading of worker adjustment assistance is the "starve the beast" fiscal strategy of the Republicans who control Washington. While a few Republicans—such as former U.S. Trade Representative Carla Hills—have advocated substantially expanding adjustment assistance, as long as those in power continue pursuing a strategy of driving deficits through the roof with unpaid-for tax cuts and prescription-drug spending and then seeking to use this burgeoning debt to justify cutting the very areas of domestic spending that help workers recovering from job loss, the odds of passing a major expansion of worker-adjustment assistance remains low.

To ignore the growing unease in our workforce is to risk a backlash against the very dynamism that our economy depends on. Instead, we need—and our workers deserve—new pro-growth policies that both encourage work and investments in workforce development while helping families cope with the pain of dislocation.


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Gene Sperling is a senior fellow at the Center for American Progress, the former National Economic Advisor to President Bill Clinton, and author of The Pro-Growth Progressive, available November 2005.  
 
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