James Pethokoukis

Politics and policy from inside Washington

The Great Wage Drop and wage insurance

January 11, 2011

Big WSJ story on how the Great Recession has reduced wage growth. When the unemployed do return to work, it is often with markedly lower salaries. Here is the money graf:

Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost The severity of the latest downturn makes it likely that many of the unemployed who get rehired will take wage cuts, and that it will be years, if ever, before many of their wages return to pre-recession levels, says Columbia University labor economist Till von Wachter. “The deeper the recession, the lower the wage you’re going to get in the next job and the lower the quality of your next job,” he said.

And here is the money chart:

wsj2

I am always a bit dubious of these sorts of charts since they depend on accurately measuring inflation.  Some liberal economists, for instance, claim wages have been falling since the Golden Era of the 1970s. More likely that they actually went up by at leasts 20 percent in real terms, according to researchers at the Fed.  But I have no doubt that wage growth slowed during the downturn and many folks have suffered a real and permanent loss of income. I think you will hear Democrats talk more and more about wage insurance — having government temporarily make up the shortfall between old and new jobs — especially with Gene Sperling back in the White House. He is a big proponent of the policy.  And we shouldn’t forget that John McCain proposed something like this back in 2008 during the campaign. Here is what I said back then:

This is an idea that Democrats have been inching toward: a move to a Danish-style “flexicurity” system. In that country, workers who lose their jobs have almost their entire salary replaced by the government but are also required by the government to aggressively look for new employment or accept retraining in a new field.

It’s very expensive. For the United States, completely copying the Danish model—lauded by many as a response to globalization-inspired worker angst—could cost some $400 billion to $500 billion a year if it is as expensive for us as it is for the Danes.

Now what McCain seems to be proposing is a more modest “wage insurance” idea. Under a plan originally put forward by Brookings Institution economist Robert Litan and University of California-Santa Cruz economics Prof. Lori Kletzer, a laid-off worker who once earned $40,000 and found a new job paying just $30,000 would receive $5,000 a year–broken down into quarterly payments–for two years after the initial layoff. Such a plan might cost $4 billion a year.

Yale political scientist Jacob Hacker would up the ante considerably with a $34 billion-a-year “universal insurance” program. If a family experienced catastrophic medical costs or a large drop in income—say, more than 20 percent—owing to a variety of common risks (unemployment, loss of wages because of sickness or childbirth, temporary disability, or the death of a spouse), Hacker’s universal insurance plan would make up a portion of the loss ranging from 20 percent to 50 percent of all losses or costs in excess of a fifth of that family’s income. And House Ways and Means Chairman Charles Rangel has a $1 billion-a-year plan to expand Trade Adjustment Assistance, a benefit and training program for manufacturing workers who lose jobs to trade, to include service workers.

Of course, there are downsides here. First, it could make U.S. labor markets less mobile and dynamic as there would be less incentive for workers to get back into the workforce or start a new business because of Uncle Sam’s largess—especially if the carrot isn’t accompanied by a stick. Second, the program might grow ever bigger, becoming a massive new entitlement.

Comments

We’re in need of a “fairness” index in regards to public vs private sector wages-including legacy/pension costs! Also, why shouldn’t 20% of the FED & State jobs be PT and Temp like they are in the private sector? Ask what your country can do for you?

Posted by DrJJJJ | Report as abusive
 

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