Wed, Mar 29, 2006 page9

• In a changing world, another look at wage insurance is timely

  • By Robert Shiller
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  A lot of public attention and worry nowadays surround 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 was "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 -- of 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 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 US in 2002. In the same year, the Hartz Commission recommended a version of it in Germany. Wage insurance programs have been actively talked about or 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. It would be far better, proponents of wage insurance argue, that the training 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, have not been willing to implement it on a large scale. For example, the US wage insurance program is confined to manufacturing workers over the age of 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 US$5,000 per year. The program has practically been forgotten, and will expire next year unless there is a change of heart about the worth of it. 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 call "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 would get lazy or 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 indices, 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 better manage the greatest personal risks now faced by workers around the world.

  Robert Shiller is professor of economics at Yale University.
  Copyright: Project Syndicate
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