Association for Public Policy Analysis & Management

January 16, 2017

Application to APPAM DC Regional Student Conference

Employment and Training track

Paper submission  

Wage-Loss Insurance: A Policy to Support Workers Facing Job and Income Insecurity in a Rapidly Changing Labor Market

Since the early 1990s, the United States labor market has become less dynamic: workers change jobs less often and unemployed workers need far more time to find a new position. At the same time, the financial impact of losing a job has become more severe. Wages typically fall after unemployment, and the magnitude of the loss has increased in the past 25 years. Despite these changes in labor market conditions, the United States’ policy supports for unemployed workers have not kept pace. Less than 30% of jobless workers actually receive Unemployment Insurance (UI) benefits. Moreover, benefits are exhausted after 26 weeks, even though the mean duration of unemployment is almost two weeks longer than that.

Policymakers concerned about these issues have attempted to help jobseekers minimize the impact of income loss and regain employment more quickly. Wage supplements are able to address both problems by incentivizing workers to intensify their job searches and mitigating the impact of reduced wages in their new jobs. This paper explores the capacity of several wage supplement policies to support a healthy labor market, promote rapid reemployment following job losses, reduce the short- and long-term wage losses associated with unemployment, and target support to the workers most likely to experience severe, persistent wage losses and financial hardship.

I review the empirical research to identify features of policies that successfully achieve these objectives, and find that wage loss insurance is the most comprehensive approach, able to effectively address each component. That body of research makes clear that it is not possible to address long-term wage losses in a revenue-neutral manner, making cost containment measures critical to the viability of such policies. Thus, I propose a federal wage-loss insurance program structured to achieve the following goals: (1) Support a healthy labor market with a strong participation rate; (2) Mitigate short-term wage losses; (3) Mitigate the long-term impact of the initial reduction in wages; (4) Target support to the workers most likely to experience severe, persistent wage losses and financial hardship; and (5) Contain costs in order to create a feasible, sustainable program.

This paper is organized as follows: Section 1 provides an overview of shifts in the labor market and the impact of those changes on public supports for jobless workers. Section 2 reviews the empirical evidence on the effectiveness of wage-loss supplement policies implemented both in the United States and internationally. Section 3 offers an analysis of the characteristics of effective wage-loss supplements and applies them to the goals enumerated above. Section 4 addresses wage-loss insurance’s potential impact on income inequality in the United States. Finally, Section 5 proposes offers policy recommendations regarding the design, implementation, and financing of a federal wage-loss insurance program.