What Is Wage Insurance and Why Do I Need It?

FT Contributor
A businessman looking over a wage compensation document while typing on a calculator.
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A survey in May of 2019 found that 59% of American adults claimed to be living paycheck to paycheck. In other words, over one out of every two American adults is utterly dependent on that next payday to pay their bills, purchase their groceries, and keep their car on the road.

Chances are you find yourself amongst this majority of the workforce struggling to make ends meet. If that’s the case, it’s only natural to be concerned about what will happen if your source of income stops or is even temporarily halted.

What if you’re forced to take a job that requires a pay cut? What if your hours are slashed to part-time and you lose your benefits? What if you move to a new location and have to go for several weeks or months without pay? This is where wage insurance would come into the picture.

Wage Insurance Definition

While it has been discussed by policymakers for years, as of 2019 wage insurance is still largely theoretical. The concept is to provide a security net for workers who may be forced to shift to a job that doesn’t meet their income needs.

Reasonable conditions would need to be enforced if a real version of wage insurance were ever to be implemented. For instance, to discourage job-hoppers who are looking to repeatedly claim the benefit, insurance providers could require employees to work for a certain period of time with a single employer to qualify for payments.

In addition, wage insurance would likely not exist in perpetuity, but rather for a limited period of time, say a year or two, during which a worker would be able to educate themselves through on-the-job training and have the opportunity to earn promotions and reestablish themselves at a higher salary.

Wage Insurance Purpose

Wage insurance is meant to help employees remain trained and employed within their field without the fear of receiving a pay cut or being unable to pay their bills.

It is a long-term solution that doesn’t simply focus on helping them make ends meet when they don’t have a job, as is the case with unemployment insurance. While the period spent between jobs can feel desperate, a program like unemployment insurance only helps to bridge the gap. Getting through a few weeks or months without a paycheck is a temporary concern that you can overcome in time.

What can be far more debilitating, however, is a significant drop in take-home pay once an employee has found a new job. An extended period of time spent working for an income that doesn’t properly cover your expenses can lead to chronic financial issues.

The problem often revolves around the fact that an employee who spends a significant amount of time at a company may fall behind in training, have dated skillsets, or require further education in their industry to qualify for a new job. The employee may require time to shake off the rust and hone their job search abilities after years of disuse. Added pressure comes from the modern business world, in which jobs may be outsourced at a moment’s notice if the costs become too high. All of this means workers must spend extra time, make a greater effort, and account for expenses they can’t afford.

A Brief History of Wage Insurance

Wage insurance has been discussed since the 1990s and was initially proposed in the United States in 2001 by Lori G. Kletzer and Robert E. Litan. It was discussed as a solution for curbing the natural resistance of unemployment insurance recipients to finding a job that would end their benefits. Over time the issue has repeatedly resurfaced as jobs continue to be outsourced and wages remain stagnant.

The most notable point in recent wage insurance history was when the topic was mentioned by President Barack Obama in a 2016 address. This took place as the U.S was still shaking off the effects of the Great Recession. While jobs had become readily available again, wages were still stagnant and many of the benefits of the reinvigorated economy were not being felt by the average middle-class wage earner.

While wage insurance is a popular subject to debate, the only significant national implementation it has received thus far has been in the form of the Alternative Trade Adjustment Assistance (ATAA) Demonstration Project.

While the ATAA does provide a form of wage insurance, it is restricted to those over the age of 50 who are not able to be retrained in their industry. Qualified recipients get 50% of the difference in income covered for up to two years; the total benefit amount cannot exceed $10,000.

Apart from the ATAA, no wage insurance has yet been set up. The idea may lack widespread support due to the fact that, even with the decrease in unemployment benefit expenses it would generate, wage insurance would still cost taxpayers billions of dollars per year.

Wage Insurance vs. Supplemental Unemployment Benefit Plans

It’s worth taking a moment to differentiate wage insurance and supplemental unemployment benefit plans (SUB-Pay plans). Touted as a tax-free alternative to severance packages, SUB-Pay plans are used by companies to supplement a laid-off individual’s unemployment compensation from the state. This helps to keep the ex-employee fully compensated at the same level as they were when employed.

SUB-Pay plans are helpful to employers who are looking to trim their budgets, as these aren’t full severance packages and a laid-off employee is only eligible for the plan if they are approved for unemployment insurance. However, they do little to help with the unaddressed issue of wage insurance. Critically, SUB-Pay plans terminate when the laid-off individual finds new employment.

In contrast, this would be the moment when wage insurance would take effect, helping to bolster the newly employed worker’s wages as they begin to climb the wage-ladder again.

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