Tuesday, April 11, 2006

Globalization Threatening Your Job?

Robert Shiller has an insurance policy for you.

Free trade creates both winners and losers. In terms of jobs, the winners outnumber the losers--free trade creates many more jobs than it destroys. In principle, the winners could completely compensate the losers and still be better off than they were without trade. In practice, we don't see workers in booming export industries going around compensating the unlucky workers displaced by globalization. If global competition overwhelms a domestic industry, workers may find themselves out of work by no fault of their own. As globalization renders their skills obsolete, displaced workers face dimmer prospects for reemployment at former pay rates. For open economies, a tough question arises: Can society reap the ample economic rewards from free trade and minimize the distress of worker displacement in sectors that fail to keep pace with global competitors?

In a recent Project Syndicate column Yale economist Robert Shiller discusses a couple of options for reducing the growing pains of globalization: wage insurance and livelihood insurance.

1. Suppose a worker loses her job in an industry adversely affected by globalization. She accepts a new job, albeit one at a significantly lower wage since the skills she obtained in her former job are no longer as useful. Specifically, she now earns $10 per hour rather than $16. Would government-provided wage insurance cover the entire $6 difference?

2. What type of worker receives wage insurance in the United States? What's the annual benefit cap in the United States?

3. Many jobs offer significant on-the-job training. Starting pay is low in such jobs, but as workers obtain more and more skill on the job, they can expect to command higher wages in the future. Does wage insurance provide a stronger incentive to retrain compared to traditional government vocational training programs? In what way might wage insurance actually discourage people from accepting demanding work that would provide retraining?

Wage insurance is publicly provided. The United States already faces a big social insurance crisis --as baby boomers retire, tax revenues will become insufficient to fund Social Security and Medicare payments to the elderly. In such an environment, earmarking additional tax dollars for another publicly provided insurance program seems unlikely. Shiller argues that livelihood insurance provides a more promising solution because it relies on private markets rather than public coffers.

Under livelihood insurance, workers, insurance companies, and government keep track of occupational income indexes. A worker buys an insurance policy that promises to pay out if the average income in her occupation declines. Workers hold (buy) the policies, insurance companies issue (sell) the policies, and the government simply enforces contracts. The further an occupational income index declines, the more the policy pays out, regardless of the policyholder's employment status. If a worker loses her job in an occupation where average income is rising, the policy pays nothing. Livelihood insurance insures against a decrease in the average income of an occupation, not unemployment.

4. If global forces increase the likelihood that an occupation's average income will decline, the risk associated with the occupation rises, and the price of a policy covering the occupation rises. What does a relatively high-priced policy tell workers about job prospects in the occupation represented by the policy? What signal does a low-priced policy send to workers?

5. If Shiller is right and livelihood insurance can provide mutual benefits for workers and insurance companies, why hasn't the private market seized the opportunity yet?

6. Globalization often puts the jobs of low-income workers in jeopardy. Will workers with especially at-risk jobs be able to afford the livelihood insurance that would protect them against occupational obsolescence?

Topics: Labor markets and unemployment, Free trade, Globalization, Incentives and behavior



  • At 7:24 PM, April 14, 2006, Blogger Chris Buzzard said…

    This is a little bit off the topic of wage insurance and globalization's effect on worker obsolescence, but is interesting nonetheless:

    In the 1991 film Other People's Money, a New England wire and cable company is targeted by a Wall Street power broker. At a shareholder meeting, the company's CEO, played by Gregory Peck, preaches the value of tradition and loyalty to the workers and community as reasons to save the company. The corporate raider, played by Danny DeVito, takes a more free-market approach and lectures that shareholder value should be the dominating factor. He claims that obsolescence has claimed the company and that the employees and community are responsible for their own welfare.

    As you can see, this movie scene addresses the notion of worker and company obsolescence from a wider angle than an individual's choice to insure against his/her own obsolescence.

    Follow the links and listen the speeches. Which side do you agree with?


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