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A Prescription to Relieve Worker Anxiety

Executive Summary

With the sharp slowing of the economy, worker anxiety is back in the news. But even during healthy economic times such as the late 1990s, workers feared layoffs and general job instability. The failure of Congress to approve fast track trade negotiating authority in 1997 strongly suggests that no American president will be successful in persuading the Congress and the American people to accept further trade liberalization until additional measures, aimed specifically at easing the pain of worker dislocations and encouraging rapid reemployment, are embraced by federal policymakers. In this brief, we outline and present cost estimates for two such proposals: wage insurance for qualifying displaced workers upon reemployment, and subsidies for health insurance for qualifying unemployed displaced workers. Both programs would provide benefits to full-time workers who have been dislocated, for any reason, from jobs they have held for at least two years.

Policy Brief #73

Americans have been bombarded by media coverage of the slowing U.S. economy. During the last three months of 2000, the economy generated an average of 46,000 new jobs per month, a pace much slower than the average monthly gain of 187,000 jobs for the first nine months of 2000 (and 229,000 new jobs per month average for all of 1999). The unemployment rate rose to 4.2 percent for January 2001 from 4.0 percent for December 2000, and with layoffs expected to increase in the coming months, the unemployment rate may move beyond 4.5 percent, and perhaps as high as 5 percent later this year.

In fact, many workers have been anxious about losing their jobs even during the high points of the record expansion of the 1990s, and for good reason. Despite the low overall level of unemployment throughout this period, job loss and turnover in the labor markets have been prevalent. For many workers, job loss imposes substantial costs, not only during spells of unemployment but also afterwards, if they are forced to take a cut in pay in their new jobs.

The relatively high level of job turnover in the U.S. economy—among the highest in the world—has its benefits. Flexible labor markets facilitate the rapid redeployment of labor to sectors, such as high-tech, where it is highly valued and much in demand. Young workers benefit from easy turnover, as they gain experience and skills and find better matches with employers.

But labor market churning has its downsides as well. Widespread job loss leads to feelings of uncertainty and insecurity among jobholders, especially older workers who typically suffer larger income losses when displaced. Nervous workers have less reason to show loyalty to firms and morale suffers when workers fear they might be readily laid off. For similar reasons, many Americans are hesitant about government efforts to further reduce trade barriers, which they believe places American jobs—and wages—at risk.

Continued worker anxiety clearly was one of the reasons why, even in the midst of a record-setting economic expansion, the Clinton administration failed in its 1997 and 1998 efforts to convince Congress to give the president "fast-track" trade negotiating authority. Among other factors, worker anxiety fueled the protests against the World Trade Organization in Seattle in 1999 and against the International Monetary Fund and the World Bank in Washington, D.C., and Prague in 2000. Job insecurity helps explain the political resonance of organized labor's insistence that any new trade agreements with less developed countries contain certain guaranteed or enhanced "labor standards." More broadly, fears of job loss account for surveys showing weak public commitment to further liberalization of barriers to foreign trade and investment.

The Bush administration has signaled that it wants to reach new trade agreements, in large part because other nations will form trade blocks among themselves if the United States does not push the liberalization agenda. But the current economic slowdown will make it more difficult than ever to achieve success on the trade front.

Looser monetary policy by the Federal Reserve over the next few months should dampen the severity of the slowdown and thus reduce the nervousness among workers. But as the continued worker anxiety of the 1990s has demonstrated, in an increasingly global economy good times are not enough to ease worker concerns that competition from abroad threatens their jobs or their wages. Economic argument and evidence is not likely to reduce worker concerns either, despite the widespread conclusion that trade ranks behind technological change and immigration as a source of job loss and declining real wages of less-educated workers. Without strong public support, it is unlikely that sufficient political support (or domestic consensus) can be built for restarting dialogue on trade liberalization and open markets, which is why federal policymakers should aim to implement programs that address worker anxiety and encourage rapid reemployment.

Accordingly, we propose here two benefit programs that would do precisely that: 1) wage insurance and 2) subsidies for health insurance for qualifying displaced workers upon reemployment. At recent levels of unemployment, the total annual cost of these two programs is projected at roughly $3 billion to $3.5 billion, even if the unemployment rate should rise to the 5 percent range. In our view, the economic and political benefits that these programs would promise are well above the costs, and such costs are readily affordable, given sizeable projected federal surpluses.

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SERIES: Brookings Policy Brief Series | # 74