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Tuesday, April 04, 2006

Shiller: Livelihood Insurance

Robert Shiller asks a good question, why has wage insurance lost traction in policy debates? After noting the posiive and negative aspects of wage insurance, Shiller proposes an alternative, livelihood insurance, that provides information on risk to workers, allows effective risk management, retains attractive long-run economic incentives, and would be provided by the private sector, not the government:

Whatever Happened to Wage Insurance?, by Robert J. Shiller, Project Syndicate: A lot of public attention and worry nowadays surrounds the new risks that globalization and information technology create for our wages and livelihoods. But there has been far less constructive discussion of new ideas about how to confront these risks. In fact, we might be losing the momentum we had a few years ago to implement some of these ideas...

One new idea that seemed hot a few years ago is “wage insurance.” ... the idea was simple: ... A government insurance program would pay ... people a fraction, say, half, the difference between their old pay and their pay in a new job for a specified period, such as two years. ... Despite all the intellectual applause, however, wage insurance programs are still not a significant force in the world economy. They should be. But they should also be supplemented by other devices.

One advantage of wage insurance is that it may be a more effective way to subsidize on-the-job training than traditional government-run vocational training programs. Often, after completing a government-sponsored program, participants find it impossible to secure a job with the promised higher pay. Far better, proponents of wage insurance argue, for the training to be carried out by an employer ... It seems plausible that two years is long enough for retraining, after which the employee might command a higher wage without a government subsidy.

But governments, fearing the expense of wage insurance if a lot of people exploit it, have not been willing to implement it on a large scale. ... The way to regain lost momentum is to recognize that wage insurance is only one of several new ideas for insuring the emerging risks of this century. The weakness of the current wage insurance proposal is that it pays benefits only for a limited period and relies ... on the retraining incentives that it creates. In reality, however, losing a high-paying job may be a lifetime event, and the supposed retraining that wage insurance would encourage for a laid-off 50-year-old worker often may be ineffective. ...

I proposed a different idea, which I called “livelihood insurance.” As the name implies, livelihood insurance is ... aimed at dealing with long-term changes in the labor market, rather than assuring temporary wage levels. It would also rely on the market rather than a government program.

With livelihood insurance, a private insurer would pay a stream of income to a policyholder if an index of average income in the insured person’s occupation and region declines substantially. Moreover, this income stream would continue for as long as the index stays down, not just for a couple of years...

One reason why government-run wage insurance programs must have limited duration is ... “moral hazard”: the risk that people will get lazy or would take easier, lower-paying jobs and continue to collect insurance that pays them the wage of a more demanding occupation. But this would not apply to livelihood insurance, because its benefits are tied to the rise and fall of income indices, which are beyond the control of individuals.

Livelihood insurance would also have another advantage. Since the premium would be determined by the market, it would be higher in occupations that the market believes to be in danger from outsourcing or technical change. This, in turn, would give workers a tangible warning and an incentive to anticipate job losses before they occur.

This is not to say that wage insurance is a bad idea... Both wage and livelihood insurance appear to have important risk management functions. Indeed, for the future, it is imperative to think about many new ways, involving both government and the market, to ensure that we manage better the greatest personal risks now faced by workers around the world.

    Posted by on Tuesday, April 4, 2006 at 04:39 PM in Economics, Market Failure, Policy, Social Security, Unemployment | Permalink  TrackBack (0)  Comments (3)


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