During last week’s State of the Union address, President Obama stated his intention to introduce a comprehensive plan to modernize the jobless safety net, and on Saturday, he used his weekly radio address to release the details of the plan.

The most provocative of the president’s proposals is wage insurance. Wage insurance addresses the painful and plain reality that many jobless workers take a pay cut when they go back to work. The president’s wage insurance program would make up a part of the difference between the old salary and the new lower reemployment wage, through a government-funded wage subsidy. The wage insurance proposal laid out in Saturday’s announcement would pay up to $10,000 over two years ($5,000 a year) and only be available to people earning less than $50,000 annually (for a period of at least three years) before they were laid off. For example a jobless worker whose wages are cut from $800 per week week to $400 per week would receive $200 per week in wage insurance.

Wage insurance plans were first touted by free trade advocates, justifying that  “winners” in the economy should subsidize the “losers.” The first large-scale wage insurance program in the United States is included in the Trade Adjustment Assistance program (Reemployment Trade Adjustment Assistance, which is restricted to workers over the age of 50). This targeted group of individuals certainly deserve extra compensation for these losses.

But the recent surge in interest in wage insurance comes from a broader desire to address the scourge of long-term joblessness and get people to find jobs sooner. As I’ve written before, long-term unemployment reached epic levels during the the Great Recession, and even today, five years into a jobs recovery, the level of long-term unemployment is at levels never seen before. Of course, the fundamental cause is the lack of jobs—the Hamilton project has indicated the nation is still 2.5 million jobs short of a jobs recovery. But having spoken to hundreds of jobless individual, my take is that an individual dynamic is also at play. Overwhelmingly, jobless individuals want to find employment that matches their old job in terms of pay and stature—and this is the main reason that a large share will hold out to the end of their unemployment benefits before going back to work at a lower paying job.

Evidence shows that being unemployed for long periods of time leads to labor market discrimination and worse outcomes. Getting back to work is vital. Wage insurance provides a potential salve—serving as an incentive to return to the labor market for lower pay. Ideally this gives people an “in” at a new company, or even a new line of work where they can advance to their prior wage.

This policy idea has common sense and bipartisan appeal. Why not pay people for being reemployed rather than unemployed?

There are reasons that worker advocates are skeptical. A fundamental tenet of unemployment insurance benefits is a little known protection called “suitable work.” Unemployment benefits recipients have the right to refuse job offers that the government or an employer might make if they are not reasonably fitted to their previous wage level, experience and skills. This stands in contrast to the “Work First” philosophy that for years drove welfare and workforce development policy, prioritizing job placement into any job with little regard for quality.

Wage insurance does not change suitable work requirements, but a cash incentive to take a lower-paying job is a new perspective for a program that has always felt more like insurance than a government handout. And, there is a risk that any large scale bipartisan wage insurance program would take resources from the core unemployment program, as early proponents proposed. At its worst, wage insurance can feel like a subsidy for a low-wage economy at a time when we most desperately need more government policies—such as raising the minimum wage and supporting the right to organize—to raise the quality of jobs. If employers should be accountable for paying their employees a liveable wage with good benefits, wage insurance offers them an out.

More importantly, research on wage insurance in North America has shown very inconsistent results. The first incarnation of wage insurance (reemployment bonuses) in the 1990s was predicated on the idea that the government could save money because jobless individuals receiving a subsidy would collect less in unemployment benefits. Plainly, that did not work—the cost of the program was larger than the savings from paying fewer weeks of joblessness with unemployment benefits.1 The Department of Labor commissioned a study released last week that found that “the evidence from rigorous evaluations of U.S. reemployment bonuses and the Canadian ESP, a combined wage supplement and wage insurance program, can be characterized as mixed. Measurable effects tended to be modest at best.” The administration points to a 4.4 percent increase in reemployment rates from Canada, which is meaningful but not groundbreaking.

Should wage insurance be pursued given these results? The participation in wage insurance among Trade Adjustment Assistance participants, which was 11 percent in 2014, up from less than 1 percent in 2011—shows a demonstrable appetite for this kind of help, particularly among older individuals who have the hardest time getting back to work.

At best, this is how wage insurance should be seen—as one possible menu item among approaches to help laid off workers get back to work faster, not a panacea to address structural economic change. (TAA’s focus on the older workforce might be a better approach than the administration’s attention to the low-wage workforce.) To its credit the administration has included wage insurance as one of several items meant to increase reemployment, including work-sharing (providing UI subsidies to employers to keep workers on part-time rather than lay them off during a part-time downtown), making it easier for UI recipients to access training soon after they are laid off, and providing stepped-up career coaching to those who are unemployed.

Today, nearly 70 percent of jobless individuals find a job within three months of starting unemployment insurance. In other words, the system provides effective reemployment for millions of Americans—when workers can actually collect. The most important aspect of the president’s proposals are the ones that will get less attention—that is, a dramatically increased federal role in shoring up the bedrock unemployment insurance safety net system, which has been left mostly to the states. Those proposals include an enhanced federal role in making sure that unemployment insurance trust funds are rebuilt before the next recession, fixing remaining holes in program rules that exclude low-wage, women and part-time workers and making long overdue fixes to the federal-state extended benefits program (EB).

With the job market finally showing some positive drive, now would be the right time to make these kind of structural fixes to the unemployment insurance program.  A well-structured wage insurance program is worth exploring for targeted populations, but should not be seen as a silver bullet to the problems of unemployment.


    1. Bruce Meyer “Lessons from the U.S. Unemployment Insurance Experiments,” Journal of Economic Literature, Volume 33:1 (1995, March), p. 106.