The anger is palpable.

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Fight Trumpism With Wage Insurance

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Can good policy cure Trumpism? In a world full of automation, globalization and immigration, are there better solutions than xenophobia and rage to the problems of U.S. workers bruised by job losses and battered by wage stagnation?

After decades of research, debate and experimentation, the answer coming from the left and the right appears to be the same: wage insurance. That's a catchall term for when the government supplements earnings for employees who face long-term wage reductions through no fault of their own.

You'd think Republicans would call that a costly handout that fosters government dependence. And you'd think Democrats would complain that topping off wages hardly compensates for the setbacks workers have suffered from foreign competition.

But there must be something to it because wage insurance is winning praise from economists, lawmakers and policy wonks of all persuasions. The reason may be that existing labor-market programs suffer obvious flaws that don't appear to bedevil wage insurance.

Take unemployment insurance. In the recent recession, Congress extended coverage to 99 weeks, from 26. That helped many households pay their bills, but it also delayed the re-employment of millions. That weekly unemployment check discouraged many workers from taking positions that paid less than their old ones. Once the benefits ran out, workers found that employers shunned them for having been out of the labor force for so long. Besides, benefits are available only to those who don't work; those who accept a lower-paying job get nothing.

QuickTake Minimum Wages

The more-fashionable program these days is a higher minimum wage. But let's face it, a $15-an-hour job isn't what middle-aged, blue-collar workers want or need. Many have decades of experience, and have (or had) a congenial lifestyle with paid vacations and health insurance.

Another program that's meant to help workers battered by economic change is Trade Adjustment Assistance. But the 55-year-old program, which is supposed to provide extended unemployment, health-insurance and job retraining benefits to people hurt by foreign trade, is pocked with gaps and inconsistencies.

The program, for example, only covers workers who can prove that their jobs ended because of foreign competition (and not, say, due to new technology). That's not an easy case to make. The trade-adjustment system also delays re-employment and does little for workers who earn less in a new job (unless they're over 50). Many trade-displaced workers leave the workforce and claim disability benefits, instead.

A successful program, then, should encourage rapid re-employment, compensate those who take lower-paying jobs and kick in as employees are being trained. It would also encourage workers to learn new skills in a developing industry that's hiring.

Wage insurance fits the bill on all counts. It has won over many advocates, some of whom support it for different reasons. A mid-1990s Canadian experiment had promising results -- beneficiaries showed a four-percentage-point greater propensity to take full-time work. Economists Lori Kletzer of Colby College and Robert Litan, a long-time Washington policy analyst now with the Korein Tillery law firm, proposed it in 2001 as a way to relieve worker anxiety following passage of the North American Free Trade Agreement and as China's entry into the World Trade Organization was under negotiation.

Robert Shiller, the Yale University economist, made a case for a private-sector role for wage insurance in a 2003 book. He would build on existing corporate disability-insurance programs by adding coverage for labor-market setbacks, such as when slack demand for a certain profession leads to layoffs.

University of Chicago economist Robert LaLonde made an equity argument in 2007. He thought consumers benefiting from rock-bottom prices, and employers profiting from cheap labor, ought to compensate the losers.

President Barack Obama spied a way to address inequality in January when he proposed a wage-insurance plan, drawing heavily on earlier proposals. Workers with three years' experience who lose jobs and take lower-paying ones (but earn less than $50,000), would get half the shortfall, up to $10,000, from the U.S. The cost would be less than $5 billion a year.

Some Republicans are getting behind the concept. Senator Marco Rubio, for example, in 2014 proposed that those on unemployment insurance be permitted to work while receiving benefits, and that some of the payment go toward filling the gap between the lost wage and the new one. Rubio also recommended that a monthly wage subsidy replace the annual earned-income tax credit.

To economists, wage insurance could help stabilize the economy by kicking in when conditions are weakest. By limiting payments to two years, and beginning them only when a person finds a new job or is being trained for one, wage insurance discourages workers from long stretches of joblessness. To fiscal hawks, it reduces the cost of unemployment insurance and other social-welfare programs.

Wage insurance also gives workers an incentive to accept a pay cut in exchange for training in a new job. Economic research shows that on-the-job training is more effective than outside training programs, and positions employees for higher wages down the road.

Free trade and open markets lead to economic growth -- just not for everyone. The government's role should be to help those who are hurt in the process. Until that happens, public support for trade will be weak, and disillusioned voters will find inspiration in demagogues like Donald Trump.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net