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).