Columbia International Affairs Online: Working Papers

CIAO DATE: 08/2007

The Case for Wage Insurance

Robert LaLonde

June 2007

Council on Foreign Relations


The openness of the United States to trade and technological innovation, as well as the flexibility of its labor market, has fueled impressive growth. In such an economy, workers are routinely displaced. Most find new jobs in a reasonable amount of time. But for workers with a long tenure at their previous employer, these new jobs often pay wages much lower than those they earned before. For this group, displacement is much more than a temporary setback.

In The Case for Wage Insurance, Robert J. LaLonde recommends rethinking traditional trade adjustment assistance to address this problem. He argues that existing programs, including retraining and unemployment insurance, do too little to help displaced workers whose new jobs pay substantially less than their old ones. Unemployment insurance, for example, makes up for lost income during unemployment but not for reduced income after reemployment. To fill this gap, Professor LaLonde proposes to shift resources from existing programs to a displacement insurance plan— effectively, a generous earnings supplement for a number of years—for workers facing a long-term reduction in wages.

Ultimately, well-designed displacement insurance could ease long-tenured workers’ fears of job and income loss, thereby diminishing opposition to free trade and other policies perceived as at fault. In this way, it could help Americans continue to enjoy the benefits of trade and openness, and help the United States maintain its competitiveness and leadership in the global economy.

This Council Special Report was produced by the Council’s Maurice R. Greenberg Center for Geoeconomic Studies as part of the Bernard and Irene Schwartz Series on American Competitiveness. The Council and the center are grateful to the Bernard and Irene Schwartz Foundation for its support of this important project.