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Wage Insurance Needed to Counter Large Earnings Losses Experienced by Trade-Displaced Workers

October 11, 2001

Washington, DC—Two-thirds of trade-dislocated workers earn less when they find a new job than they did on their old job. One quarter of these workers experience earnings losses in excess of 30 percent. Our political process should do a better job of recognizing these costs of freer trade to individual workers and implement effective mechanisms for easing the necessary adjustments. A program of wage insurance that would replace a substantial portion of the lost earnings, for up to two years following the date of initial job loss, would directly address these costs and should be adopted.

Job Loss from Imports: Measuring the Costs by Lori G. Kletzer, the second publication in the Institute's Globalization Balance Sheet series, concludes that many American workers are concerned about trade-related job loss with good reason. Import-competing job loss is very costly. Vulnerable workers experience considerable difficulty regaining employment, and suffer large and persistent earnings losses upon reemployment.

Globalization brings large and widespread benefits to the economy as a whole. But this process imposes costs that are concentrated on the workers in domestic industries whose products compete with imports. Producers also incur costs but public concern, as measured in opinion polls, is largely for workers who are at risk of losing jobs and wages. Large economywide benefits can be used to compensate the losers from freer trade.

This new study identifies who bears these costs and measures the size of the burden. It reveals that there is indeed job loss associated with import competition and that job loss is costly for many workers due to difficulties finding new employment at a level of pay similar to the old job. But these high costs are not unique to "trade-displaced" workers, as workers displaced from manufacturing jobs for other reasons incur similar costs. If workers and consequences are alike, across differing causes of job loss such as increasing foreign competition, technological change, downsizing, and restructuring, then policymakers should consider adjustment programs for all displaced workers and broaden eligibility for them beyond trade-displaced workers.

Kletzer bases these conclusions on three key findings:

• Workers displaced from import-competing manufacturing industries are similar to other displaced manufacturing workers with respect to age, educational attainment, and job tenure. They are slightly older, notably less educated and with longer job tenure than workers displaced from non-manufacturing industries.
• The transition to a new job is difficult for these workers yet the difficulties do not end with the new job. As noted above, two-thirds of trade-dislocated workers earn less when they find a new job than they did on their old job. One quarter of these workers experience earnings losses in excess of 30 percent. This distribution of earnings losses is very similar to that found for all displaced manufacturing workers.
• The industry where workers are reemployed matters a great deal for earnings losses. About one-third of all import-competing displaced workers are reemployed back in manufacturing. Another one-third are reemployed in the nonmanufacturing sector and the remaining one-third were not reemployed at all when surveyed. Regaining employment in manufacturing greatly reduces earnings losses.

Based on the analysis in the book, Kletzer offers three policy implications:

• The strong association between advanced age, less formal education, long tenure, and difficult labor market adjustment can be used to target assistance at certain groups of workers rather than providing the same services to all.
• One cost-effective approach may be to offer low-cost job search assistance to aid workers in reemployment in manufacturing, where earnings losses will likely be minimized.
• A program of wage insurance should be adopted. Kletzer proposes a program open to all workers displaced through no fault of their own, under which workers reemployed in a new job that pays less than the old job would have a substantial portion of their lost earnings replaced for up to two years. For example, at a 50 percent replacement rate, a displaced worker who once earned $40,000 per year and was reemployed in a new job paying $30,000 per year would receive $5,000 per year for a period from the time of re-employment to two years after initial job loss. Annual payments could be capped, perhaps at $10,000. Eligibility could be limited to workers with a minimum of two years tenure on the old job. A key advantage of wage insurance, as a component of the safety net for displaced workers, is that it encourages reemployment. Wage insurance also directly addresses the critical problem revealed in the study: earnings losses upon reemployment.

  About the Author

  Lori G. Kletzer is an associate professor of economics at the University of California, Santa Cruz. This book was written while she was a Visiting Fellow at the Institute for International Economics. Before joining UCSC, she was a faculty member at Williams College. She has also taught at the University of Washington and was a Visiting Fellow at the Brookings Institution. Her research has been published in a number of professional journals including the American Economic Review, Journal of Economic Perspectives and Industrial Relations. Dr. Kletzer has a forthcoming book, to be published by the W.E. Upjohn Institute for Employment Research, that examines the relationship between increasing foreign competition and changes in employment and job loss at the industry level, Imports, Exports and Jobs: What does Trade mean for employment and Job Loss?

  About the Institute

  The Institute for International Economics is a private, nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade and investment issues and recommends practical policy approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations.