Wage Insurance for Displaced Workers

Trade and automation have contributed to substantial job losses in the United States in recent decades. Such rapid changes to the labor market underscore the importance of considering innovative programs that provide financial protection to displaced workers. Wage insurance is one approach that provides both compensation for job loss and incentives to return to work. As part of the Re-Employment Trade Adjustment Assistance program, displaced workers receive up to half of the difference in wages between their old job and their new job for up to two years. The project examines how this policy influences labor market outcomes. The research specifically focuses on the amount of time people remain unemployed and their wages upon returning to work. The research, thus, is useful in exploring wage insurance as a potential alternative to standard unemployment insurance systems.

Under Re-Employment Trade Adjustment Assistance (RTAA), workers over age 50 who lose their job to import competition can receive up to half of the difference in their pre-displacement and post-displacement earnings ("wage insurance"). The research uses a regression-discontinuity (RD) design based on eligibility age to estimate the causal effect of this program on labor market outcomes. Merging administrative data on trade-displaced workers with nationally representative employer-employee linked data, the project looks at the long-run effects of wage insurance on re-employment wages, unemployment durations, wage growth, and occupational quality over time at the national level. The RD estimates are used in connection with a sufficient-statistics framework to evaluate welfare effects. Workers receiving wage insurance payments may smooth consumption while accumulating human capital in a new industry or occupation. The program may, however, generate moral hazard by incentivizing workers to take lower-paying, less demanding jobs, because part of their lost wages are covered by insurance. The model quantifies the magnitude of these two effects. The project advances our understanding of wage insurance as an alternative to unemployment insurance.