Every year, millions of workers lose their jobs due to technological advancements, international competition, offshoring, and regulatory changes. These shifts can be devastating, especially for those with specialized skills and long tenures.

An innovative social policy—wage insurance—shows great promise in alleviating the harmful effects of job loss, in ways that traditional unemployment insurance cannot, according to a new working paper from UC Berkeley’s Goldman School of Public Policy, Carnegie Mellon University’s Heinz College, and the Federal Reserve Bank of New York.

Labor disruption

Economic transformations and downturns often result in prolonged unemployment, particularly in cyclical industries like automobile manufacturing or textiles. Displaced workers face severe repercussions, including financial instability and long-term career setbacks. Job displacement is also linked to broader societal problems, such as reduced educational attainment for children, increased political polarization, and higher mortality rates.

Traditional support mechanisms like unemployment insurance and retraining programs aim to cushion the impact of job loss and equip workers with new skills. However, these measures often fall short of fully addressing the needs of displaced workers, especially as emerging technologies like AI and decarbonization continue to disrupt labor markets.

Wage insurance provides additional income to workers who find new jobs at lower wages, bridging the gap between their previous and current earnings. The recent study focuses on the wage insurance provisions of the Trade Adjustment Assistance (TAA) program, which aids workers displaced by international trade.

Supporting reemployment

Under the TAA program, displaced workers undergo mandatory job training and receive extended unemployment benefits. Workers aged 50 and older are eligible for Reemployment Trade Adjustment Assistance (RTAA), a wage insurance program that offers a subsidy of up to half the difference between their old and new wages for up to two years. This subsidy makes re-employment more attractive, particularly in lower-wage jobs, and provides substantial support to those experiencing the greatest wage declines.

The study combined data from TAA petitions with the U.S. Census Bureau’s Longitudinal Employer-Household Dynamics dataset, tracking the employment and earnings of 76,500 workers from about 1,000 TAA-petitioning firms. These workers, who are typically older, have longer tenures, and lower educational attainment, are particularly vulnerable to the impacts of job loss.

Key findings from the research include:

• Increased employment rates: Wage insurance eligibility boosted employment rates by 8 to 17 percentage points in the two years following displacement, although the effect diminished after four years.
• Higher earnings: Eligible workers saw a 10% increase in their pre-displacement earnings, amounting to over $18,000, or a 26% increase, over four years.
• Quicker re-employment: Wage insurance led to shorter unemployment spells, driving positive earnings outcomes.
• Cost-effectiveness: The program was self-financing, with increased tax receipts and reduced unemployment insurance payments fully offsetting its costs.

While the current wage insurance program is limited to workers affected by international trade, its success suggests potential broader applications. The program’s reach includes service sectors and extends beyond narrow industries and geographic areas, indicating its viability for a wider array of displaced workers.