Increasing Economic Security for American Workers

Jeffrey R. Kling
Jeffrey R. Kling Former Brookings Expert, Associate Director for Economic Analysis - Congressional Budget Office

March 29, 2007

The introduction of wage insurance is anticipated to reduce unemployment duration for those with wage losses by a small amount. The incentives for shorter duration are two-fold. First, the wage of the new job is higher with wage insurance, making work more attractive than it is without wage insurance. Second, the amount of time during which a worker can collect wage insurance decreases for each day since the job loss that a new job is not found.

There is, however, a counter-acting incentive that total annual income is higher with wage insurance, which can motivate longer unemployment spells in some cases. For example, without wage insurance a worker previously earnings $42,000 per year may take a new job at $30,000 per year immediately after job loss in order to ensure making a minimum annual income (say, to pay a mortgage). If the worker has wage insurance, however, and is confident that a “fall-back” job at $30,000 per year will be available throughout the first several months after job loss, she can afford to search for up to two months for an alternative and still have at least $30,000 in income during the first year after job loss (with $25,000 in earnings from ten months of employment on the fall-back job plus $5,000 in wage insurance).

The evidence from the Canadian Earnings Supplement Project is the most directly relevant to this question, as it provided a form of wage insurance (although not exactly the same as that being considered in the U.S., as it had a requirement of finding a new job within 26 weeks, 75 percent earnings replacement, more generous unemployment insurance benefits, etc.). This project found that unemployment durations were reduced slightly, but not significantly. There was a significant increase in the percentage working full-time 26 weeks after job loss, likely driven by that program’s requirement to have full-time work within 26 weeks in order to qualify for the wage supplement payments. A substantial part of this increase involved switching from part-time to full-time work and it was not comprised solely of switching from unemployment to full-time work.