How Much Can Wage Insurance Help the Prospects of Children?

I welcome Miles Corak’s warm advocacy of wage insurance: in fact, I am a long-standing supporter of and early advocate for such a policy. I agree that it holds out the promise of greatly improving the income supports available to help struggling breadwinners and their families.

But I am less sure that a wage insurance program will have a sizeable long-term impact on the economic prospects of children: largely because the children in greatest need have parents who are unlikely to earn enough to benefit from an insurance scheme of this kind. 

Wage Insurance Revisited

Unlike unemployment insurance, which insures workers against temporary earnings loss resulting from involuntary joblessness, wage insurance helps protect workers against the earnings loss they suffer when they are forced to accept a wage cut in order to get reemployed.

As I conceive wage insurance, it would provide experienced, laid-off workers with monthly or quarterly earnings supplements, compensating them for a portion of their lost wages. Assume the program insured workers for one-half of their earnings loss. An experienced laid-off worker who previously earned $800 a week who lands a new job paying only $400 would receive a regular insurance check for $200 – lifting his income to $600 a week.

A sensibly designed program would cap the worker’s annual supplement payment to keep the program affordable. Two further crucial elements of any program are:

  1. Wage insurance payments do not commence until a worker becomes reemployed.
  2. Payments cease within a specified period after displacement occurs (say, within 18 or 24 months).

Workers would therefore have an incentive to find jobs as soon as possible, since those who find a new job early in the eligibility period would receive wage supplement payments for longer than workers who delay job acceptance.

The Limits of Wage Insurance

An obvious limit of earnings insurance is that it does not offer much protection to workers who are steadily or erratically employed in low-wage jobs. If a worker’s wage was low in the job that was lost, the worker is unlikely to receive much of a supplement from wage insurance, since the wage in the new job is likely to be about the same as the wage in the old job.

Even in the case of a worker who receives generous wage insurance supplements, the policy is intended to cushion the worker’s wage loss on a temporary—not permanent—basis. While the income payments can reduce temporarily the economic and psychological loss connected with accepting a worse job, when the wage supplements end the worker must still rely on the job market to provide income for dependents.

In sum, wage insurance is a valuable policy tool for helping breadwinners who have been bruised by job market reverses. But by definition it can do little to help families trapped in a low pay-no pay cycle: and it is the children in those families who need the most help in terms of boosting upward mobility.