Technology & Trade

Trade Adjustment Assistance: Part II

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By William Reinsch: 

In my previous column on Trade Adjustment Assistance (TAA), I took the coward’s way out and postponed any actual suggestions for improvement until later. Later has now arrived, and I need to fulfill my commitment by looking at the adjustment problem in somewhat greater detail. 

First, while I previously suggested that it might be time to think about the adjustment problem holistically and fold the trade-specific program into a beefed-up unemployment insurance program that covers all workers who have lost their jobs for any reason, it is worth noting that there are some differences in the two populations — on average, trade impacted workers are older, less educated, have a narrower range of skills and have lost higher paying jobs than workers who are unemployed for other reasons.  That means trade-impacted workers are less mobile, less likely to have skills useful in a rapidly changing economy, and are more likely to be in a position of being offered new jobs that pay substantially less than their old ones. The fact that they are also often older adds to the difficulty. The Department of Labor reported that in 2012 the reemployment rate for workers aged 55 to 64 was 47%, while for workers aged 20 to 54 it was 62%.

If nothing else, those characteristics make clear the difficulty of the problem and the political discontent our inability to solve it leaves behind. So, to quote Lenin, what is to be done?  How do we devise a program that provides hope to this difficult population? 

One place to look for at least a partial answer is Denmark, which has spent a good deal of time thinking about the problem and testing innovative approaches. These have been much studied, although most of the literature is from the first part of the last decade and does not address how the program has fared during the Great Recession and under the right of center government that came along in its wake. 

The Danish program is known as flexicurity, and it has several basic features. First, as implied by its name, it sets up a tradeoff of greater employment (not job) security in return for greater management flexibility in hiring and firing (The latter has been more an issue in Europe than here because of accumulated restrictions over the years that make shedding employees for any reason very difficult).  Note that the first element here is employment security, not job security. That means Danes can expect a job but not necessarily the job they have been holding. In other words, the purpose of the program is not simply to hold everyone in place, and, in fact, the Danish economy has demonstrated considerable churn, both because it is easier for employers to lay workers off but also because workers know that there are procedures in place that will help them get another one, which makes it easier for them to leave voluntarily.

Second, the program provides more generous benefits than we do. Workers who lose their jobs get a benefits package equivalent to as much as 90% of their previous earnings, and they can receive that for two years — recently reduced from four (Remember that this is a socialist economy with a much higher tax rate than in the U.S.)

Third, the program tries to quickly “activate” its unemployed workers, which means engaging them in a program to help them find a new job that usually includes retraining. Interestingly, while the government pays private parties to conduct the training, it pays only a portion of the cost up front and only pays the rest once the individual has found a job. That pushes the training providers to provide training for actual jobs that exist in the economy and to spend relatively more time developing job search skills, resume writing, interviewing, etc. These are all areas where our programs could use improvement. 

Are there lessons there for us? There are some, although the differences in our economies, including in size, get in the way of simply adopting the Danish approach. What we can learn from the Danes is that benefits need to be provided for a fairly long period of time, particularly to the trade-impacted workers, and that benefits need to address not only income but also health care, which is a serious and growing problem particularly for the unemployed who have lost their health plans. In a perfect world, we would also be able to do a better job of tailoring services — including job search and relocation assistance — to the individual situation of each worker, but that is much more difficult in an economy the size of ours.

Another proposal that has attracted attention is wage insurance which, in this context, is essentially compensation for a portion of the wages the worker has foregone by taking a new lower paying job. This concept was included in the expanded TAA program that was authorized a number of years ago, but not enough people have received the benefit to permit a judgment as to whether or not it is helpful. 

The problem with all these ideas, of course, is that they cost money. Estimates vary widely depending on whether you are talking about only trade-impacted workers or the entire population of unemployed as well as the level and scope of benefits provided. Clearly, though, a program serious enough to achieve its objectives would cost substantially more than the current one, which would no doubt arouse political opposition. 

That opposition, however, should be weighed against the cost — to our economy as well as our political system — of coping with a growing number of alienated and disgruntled unemployed workers. We are already seeing what that can do to our political system, and that alone should justify the cost.   
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: barnyz via Flickr
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