What Is This ‘Wage Insurance’ Obama’s Talking About?

In his State of the Union address this week, President Obama reinforced unemployment insurance and job-training programs as ways the government can help those in need of work. Then he listed “wage insurance” as a distinct and separate recommended method:

Say a hardworking American loses his job — we shouldn’t just make sure he can get unemployment insurance; we should make sure that program encourages him to retrain for a business that’s ready to hire him. If that new job doesn’t pay as much, there should be a system of wage insurance in place so that he can still pay his bills.

Though for many Americans this may have been news, wage insurance is an idea that isn’t particularly new. The University of Chicago economist Robert LaLonde wrote the The Case for Wage Insurance in 2007, arguing that the basic unemployment-insurance system only gave income to workers without jobs and thus failed to help the many (often older) workers who could only find jobs that provided much less pay—a pattern common among those who lost their jobs to trade with low-wage nations. The concept was premised on a notion of fairness: The set of winners from trade (consumers benefiting from rock-bottom prices and employers benefiting from cheap labor) ought to compensate the losers.

In a similar proposal, the Brookings economist Gary Burtless wrote in 2014 that wage insurance “would provide experienced, laid-off workers with monthly or quarterly earnings supplements, compensating them for a portion of their lost wages.” As he had it, a program could cover half of a worker’s lost earnings, landing them a total compensation that was the average of their old and new wages. Proposals for such a system often cap their generosity at a certain salary (say, $50,000) and a certain duration (two years).

Wage insurance like this is actually just one of a range of policies that could all be fairly described by the phrase “wage insurance”—efforts to protect families from shocks to their income, or from barebones wages more generally. Americans already benefit from some of these policies—they aren’t something that only exist among the usual suspects, Scandinavia or Canada. One of the earliest forms of wage insurance is unemployment insurance, made national in 1935.

Some companies—typically ones that are unionized or those prone to cyclical and seasonal furloughs and layoffs—provide their own version of wage insurance. Employers can set up a trust fund that holds any combination of employee and employer contributions. Such Supplemental Unemployment Benefit Plans have been around since the 1950s. Unemployment insurance plus SUB plans helps employers who lay off workers, but want these experienced unemployed workers to not take first job available, and wait in case the employers call them back to work.

The last form of wage insurance is the Earned Income Tax Credit, advanced by President Nixon and signed into law by President Ford in 1975. The EITC subsidizes low-income working families—and, indirectly, their employers. The credit equals a fixed percentage of earnings from the first dollar of earnings until the credit reaches its maximum; both the percentage and the maximum credit depend on the number of children in the family. Those eligible for some credit range from a single worker with no children earning less than about $14,000 to a married couple earning less than approximately $50,000 with three or more children.

The EITC does on a permanent and automatic basis what Obama says he wants to do more of via wage insurance—subsidize the low wages of a family with money other than the employer’s. From the point of view of the employee, the EITC is insurance against a low-wage employer. From the point of view of the employer, the EITC pays its workers money.

Insurance always introduces the possibility of moral hazard. For example, factory owners may change their behavior after they buy insurance, and not adopt costly practices that minimize fires. To protect against this behavior, insurers impose deductions and lobby the government for fire codes.

​Economists have concerns that wage insurance—such as the EITC—could have the outcome of generating more of the undesirable insured event, in this case low-wage jobs. Insurance against the high costs of low wages and displaced workers will suffer from moral hazard (and, thus escalating costs) unless taxpayers (the insurers) impose co-pays and deductions. Minimum wages are a form of co-pays and unions are a type of fire code. Both together help minimize the existence of low wages. Wage insurance, like any insurance policy, is good to have when you need it, but it’s better if you don’t need it at all.