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Saturday, January 20, 2007

Helping Displaced Workers

The Economist looks at the winners and losers from globalization and how the losers might be compensated:

In the shadow of prosperity, The Economist (open link): Nestled among the wooded Blue Ridge mountains in Virginia's far south-west, Galax is ... home to ... a huddle of textile and furniture factories. Over the past few years, globalisation has hit hard. Unable to compete with Mexican and then Chinese competition, the town's old industries have withered, taking thousands of jobs with them. Last year ...[t]hree big factories closed their doors... More than 1,000 people, around one-sixth of the town's workforce, lost their jobs.

Galax then acquired an “Economic Crisis Strike Force” for displaced workers... [T]he Strike Force helps people apply for Trade Adjustment Assistance (TAA), the government support America offers to those deemed to have lost their jobs to global competition. TAA includes up to two years of unemployment benefits while retraining, temporary subsidies to help pay medical insurance and, for those over 50, a short-term top-up to any lower-paying new job. The centre also co-ordinates more basic help, from child care to food banks run by private charities.

Thousands of people have walked through its doors in the past nine months, many several times. Around one-third of those laid off last year are being retrained. ... For some, particularly those in their 50s, the future looks bleak. At 59, Paul Rotan sees little chance of finding another job with health insurance, but he is still six years away from qualifying for Medicare... He is terrified of what will happen in June when the temporary public subsidies for his health insurance end.

But other, mainly younger, workers are already better off. After 19 years in a textile factory, Bobby Edwards has retrained as a radiologist. ... Few of these people are enthusiastic about globalisation. “No one trusts China around here,” is a common refrain. But government help has cushioned the shock. “I'd be lost if they weren't here,” says Mr Rotan, nodding towards the centre's staff.

In the neat world of economics text-books the downside of globalisation looks much like Galax. Low-skilled workers in a rich country, such as America, suffer when trade expands with a poorer country with plenty of much cheaper low-skilled workers, such as China

If labour markets are efficient in the rich country the displaced workers should find new jobs, but their wages will probably fall. Although the country overall gains handsomely, these people are often worse off. Hence the case for redistributing some of trade's gains and compensating the low-skilled losers. ...

One study suggests that, during the 1980s-90s, 65% of manufacturing workers in America who lost their jobs to freer trade were employed two years later, but most took a pay cut. A quarter suffered pay losses of more than 30%. ...

How much to spend? Nonetheless, help for displaced workers has always been modest compared with the gains from trade. ... The United States spends around $1 billion a year on helping trade-displaced workers. But the economy overall, by one estimate, gains $1 trillion a year from freer trade. ...

Public scepticism about trade is rising in both rich countries and poor. A host of big economic shifts, such as rising income inequality, are blamed on global integration. ... America's elections last November brought in a clutch of lawmakers deeply opposed to freer trade. To control this backlash, globalisation's champions are keen to appear more sensitive to the losers.

Already, some shifts are evident. One of the first bills introduced in the Democrat-controlled Senate is a big expansion of TAA, covering not merely manufacturing workers but also service workers whose jobs have been “offshored”, and offering help not just to individual factories, but to whole industries. ... The fate of the current bill is uncertain, but the Democrats have stressed that their support for future trade agreements depends on more help for workers who lose out. ...

But cause and effect may not be so obvious. ... To judge by the number of people receiving TAA, the [displacement is low]...: fewer than 120,000 workers were deemed eligible for it in 2005. In the much bigger services sector, the share is lower still. For all the hoopla about offshoring, the best estimates suggest that only about 1m American service-sector jobs have actually moved overseas. In short, trade's role in job losses is much smaller than the public angst suggests.

Most economists have long held that technology, rather than globalisation, is the main cause of the rising gap between the pay of the high- and low-skilled. But some argue that the distinctions between trade and technology are increasingly irrelevant. ... (see article).

In the 21st century competition between firms and industries, ... is becoming less important than competition between individual tasks within firms in different countries. Whether he is employed in a furniture company or a hospital, the American data-processor will be competing against someone from Bangalore. Rather than affecting entire industries, or whole factories, global competition will affect individual jobs—skilled as much as unskilled.

Such a shift helps explain the popular nervousness about globalisation. Many more workers are worried that their jobs will be at risk. That, in turn, increases the political appeal of assisting trade's losers. ...

An alluring Danish model As a result, it may be better to focus on policies which improve job prospects for all workers. In Europe, Denmark has led the way. The Danish system of “flexicurity” appears to offer the best of both worlds: dynamic labour markets and low unemployment coupled with generous support for those who lose their jobs. ...

Employers hire and dismiss people at will. Around a quarter of the workforce is unemployed at some point in any year. But the jobless enjoy generous welfare benefits while they look for work, around 80% of their previous wage on average. To ensure this does not deter people from finding new jobs, the Danes oblige the unemployed to be trained and to look diligently for work. ...

But Denmark's approach has evolved over decades and cannot easily be copied. Besides, it is extremely expensive. ... Denmark ... spends more than 5% of GDP on the unemployed, including almost 2% of GDP on its “active” training and job-search programmes. ...

For America, which currently spends a mere 0.16% of GDP on such “active” labour-market policies, the idea of Danish-style “flexicurity” is more a slogan than a serious suggestion. ...

An alternative approach is to give displaced workers a subsidy if they are forced into a lower-paying job. Such “wage insurance” already exists in a modest form on both sides of the Atlantic. ... Since 2002 America's TAA has offered wage insurance to any trade-displaced worker over 50: the government pays half the difference between the old and new wage for two years, up to a maximum of $10,000.

Getting other things right These experiments are too new to evaluate. But in theory wage insurance is appealing. It helps soothe workers' fears that they will suddenly lose income, but also keeps labour markets flexible by encouraging people to find a new job quickly. Many on America's centre-left see it as the key to maintaining political support for trade.

The proposed expansion of TAA would make any trade-displaced worker over 40 eligible for wage insurance. And more ideas are floating around Washington's think-tanks. ...

As public fears of globalisation rise, so will the political appeal of these schemes. But they will have less impact than getting other, more basic, policies right. Globalisation underscores the need for a flexible, dynamic labour market and a well-educated, adaptable workforce. And a worker whose health care is not tied to his job will be less worried about trade than one for whom job loss also spells the loss of medical insurance. The tasks of ... reforming health care ... and improving education ... are far more important than any amount of experimentation with wage insurance or retraining schemes. If politicians really want to respond to the worries caused by globalisation, those are still the best places to start.

In an earlier section, after explaining how an older worker relies heavily on the TAA program, and how a younger worker benefited from retraining ("government help has cushioned the shock"), the article turns to economic theory and concludes: "Although the country overall gains handsomely, [displaced workers] are often worse off. Hence the case for redistributing some of trade's gains and compensating the ... losers." Thus, the article cites both theory and evidence in favor of programs that help displaced workers.

In addition, the article finds further support for the wage insurance component of TAA because it can help with labor market flexibility. The first paragraph of the last section says "wage insurance is appealing. It ... keeps labour markets flexible..." The third paragraph says "Globalisation underscores the need for a flexible ... labour market..." The conclusion? "The tasks of ... reforming health care ... and improving education ... are far more important than any amount of experimentation with wage insurance." Thus, wage insurance is appealing, it's needed, and that leads to the conclusion that it's not very important. I can't explain why the article spends so much time building a strong case for helping displaced workers, then is dismissive of programs that do just that in the final paragraph.

One final point, there is no need to distinguish between workers displaced by technology and those displaced by globalization when talking about which workers deserve help. But both are a form of structural change and cause workers to be hurt for reasons that have nothing to do with their own abilities and effort, they are just unlucky enough to be employed in the wrong industry, and wage insurance and other programs should apply in either case.

    Posted by on Saturday, January 20, 2007 at 02:16 AM in Economics, International Trade, Policy, Unemployment | Permalink  TrackBack (1)  Comments (49)


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    [Source: Economist's View] quoted: One final point, there is no need to distinguish between workers displaced by technology and those displaced by globalization when talking about which workers deserve help. But both are a form of structural change and... [Read More]

    Tracked on Saturday, January 20, 2007 at 09:52 PM


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