To give a bit of background, the Financial Services Forum is a trade association consisting of CEO's from 20 of the top financial institutions in our country. Members include Kenneth Lewis from Bank of America, Vikram Pandit from Citi, Lloyd Blankfein from Goldman Sachs, and Richard Fuld, Jr. from Lehman Brothers. As CEO's, they are profiting quite nicely from the globalization of the world economy. Unfortunately, factory workers whose jobs are being shipped to China don't have the same warm fuzzy thoughts about free trade.
Until announcements like these start to outnumber announcements like these, it behooves our chief executives to stave off calls for tariffs and other protectionist policies by offering more generous unemployment benefits. The Adjustment Assistance Program (AAP), as described in the white paper, would help out workers by offering wage-loss insurance, continued health insurance coverage, penalty-free withdrawals from 401(k) and IRA plans, expanded access to worker training programs, and a more progressive approach to funding these programs through various payroll taxes. The expansion of unemployment benefits is one of the few programs we'll be seeing that will align the interests of both the working classes and the business community.
Although the authors take great pains to explain that globalization is not the cause of most of our job losses, they choose to model these proposed expanded unemployment benefits along the lines of the Trade Adjustment Assistance and Alternative Trade Adjustment Assistance programs, which are programs for production workers who become unemployed due to "...increased imports or shifts in production out of the United States."
I am not shy about admitting that I'm not all that good at taking a 30-page report and condensing it down to a single blog post review. I'll let you read the report if you're so inclined. It's well-written and easy to follow. I do want to comment on what I think are certain eye-opening highlights.
Wage-Loss Insurance
Like last year's report, this current report makes no pretense that the economic fortunes of average Americans are improving. Among the findings (on page 6 of the current report)
In 2007, for example, private-sector employment expanded by about 900,000 jobs. But this net increase masked the far more dramatic shifts below the surface – the economy created about 30 million jobs, while losing roughly 29 million. What that means is that, based on an average of four 40-hour work weeks a month, about 25,000 jobs are destroyed and created every hour that America is open for business.Also on page 6:
Economic change and adjustment is essential to the health of the U.S. economy. Without all of this reallocation, average living standards would be harmed not helped. That said, adjustment presents very real costs to American workers, communities, and firms. There is considerable evidence that involuntary job loss can be costly. About two-thirds of displaced workers find new full-time jobs—but at an average wage loss of 13-17%. And this average disguises a wide range of experiences: 36% gained re-employment at or above previous earnings, whereas 25% suffered earnings losses of 30% or more.The authors, and indeed, probably a lot of corporate executives, seem sensitive to one set of statistics from last year's report (page 37:)
....the share of national income accounted for by the top 1 percent of earners reached 21.8 percent in 2005—a level not seen since 1928. From 2004 to 2005, the mean income change reported by the bottom 90 percent of tax filers was a decline of about 1 percent; in contrast, the mean change for the top 1 percent of filers was a rise of 14 percent.The AAP would set up a wage-loss insurance program that would replace 50% of a worker's lost wages for up to two years following the date of the job loss. On page 12 of the .pdf file, the authors reiterate that the program would be limited to workers age 45 and over, which is an obvious nod to the widespread impression that age discrimination against older workers is thriving. This program would obviously take the sting out having to take a lower paying job after losing your prior job.
I'm puzzled by this part of the current report (page 11 of the .PDF file);
When I think of moral hazard, I think in terms of disapproving of programs that lead people to stay on the public dole for longer periods of time. The authors obviously want people to be more selective and hold out for higher paying jobs.Some have voiced concerns about possible moral-hazard implications of wage-loss insurance. One is that it would encourage the unemployed to take low wage jobs rather than continue searching for higher wage jobs, and would thereby result in fewer high-wage jobs in the overall economy.
On the one hand, it is certainly true that workers would have an incentive to take a job more quickly because remaining unemployed would now be more costly. This could lead them to take lower paying jobs than they might otherwise take. On the other hand, however, a high-wage job would now be more valuable and less risky. This might actually create an incentive to search longer when unemployed. [Emphasis mine.] We believe that the magnitude of these implications of wage-loss insurance are likely to be small, and are unlikely to offset the benefits of such insurance.
To me, the job market is a lot like selling a house. You may get a not-so-good offer now, but you may receive even worse offers in the future. We don't have crystal balls, so we have no way of knowing whether we are making the correct decision until it's too late to act. A lot of people would jump at the first semi-reasonable offer tossed their way because they simply cannot afford a longer period of unemployment. If people are pessimistic about their chances at re-employment, I'm not sure this 50% wage replacement incentive would keep people out of the job market for longer periods of time.
The authors also hint on page 12 that this program might only cover workers who have been employed at the same job for two or more years. This would obviously not work for people who have been forced into a career of short-term contract work, where two years of employment with the same company is an almost unheard of luxury.
Finally, I'm scratching my head at this statement on page 8:
Moreover, it [wage-loss insurance] can also benefit society by allowing workers to take riskier but higher-output jobs that pay higher wages.Are they implying that too many workers are turning down a lot of risky but higher paying jobs? What are these risky high pay jobs? Are these start-up jobs? For example, an employee may opt to earn $80,000 at Pfizer rather than $120,000 at some frat boy's start-up company? Is there some sort of national crisis because too many people are turning down high paying jobs?
I figured out 15 years ago that we have no way of predicting job security. I worked for a company that was definitely on the downward slope, but managed to hang on for another three years. Several employees bolted for a new branch office being opened by an old and prestigious New York firm. The new branch office closed down just before Christmas that year. It might just be me, but I tend to go for the money unless I knew for certain the management is populated by idiots and I'd be miserable at the job.
Regardless, I'm sure many workers would consider themselves lucky to be faced with such a dilemma.
Health Insurance (Beyond COBRA)
It's amazing how the cost of health care continues to rise and the scope of health care coverage continues to fall no matter what policies are enacted. I think we all know COBRA used to be affordable but is now prohibitively expensive. We also know that COBRA does nothing for you if your employer never offered health care to begin with.
I actually like the AAP solution, of having unemployment insurance pick up all of the COBRA payments for workers while they are still receiving unemployment payments. If a worker can demonstrate that he or she is receiving medical coverage through a spouse, the worker could then collect an additional 10% bonus in their weekly unemployment check.
In a way, a worker could be better off with their medical coverage while unemployed. For example, a worker could be paying most or all of their medical premiums while employed. I assume that under the AAP, 100% of the COBRA costs would be picked up regardless of how much the worker was paying previously.
THE CATCH is, if your employer did not provide medical coverage, you would still lack medical coverage during unemployment. This fact sheet from the National Coalition on Health Care has all sorts of interesting tidbits. However, I'll zero in on one in particular.
The percentage of people (workers and dependents) with employment-based health insurance has dropped from 70 percent in 1987 to 59 percent in 2006. This is the lowest level of employment-based insurance coverage in more than a decade.So, obviously, the trend is that the percentage of people with employment-based health insurance will decline in the next decade rather than rise.
Penalty-Free 401(k) and IRA Withdrawals
Penalties are already waived for certain situations, like for purchase of a first home, education costs, etc. The AAP would allow penalty-free withdrawals if you lose your job. Taxes on the withdrawals could be waived for payment of health insurance premiums.
I suppose this is a nice proposed benefit. However, it sucks that we don't have pensions anymore, and we need to tap into our retirement savings to get through economic downturns. For many people, like tech workers stuck in the short-term contract trap, raids on 401(k) accounts are common even when the economy is firing on all cylinders.
Retraining and Continued Education
We most often think of factory workers being retrained for skilled jobs when the factories shut down. As a matter of fact, that was the entire rationale for shutting down our factories over here and shifting production overseas. Thanks to retraining benefits, factory workers are supposed to better off after the factories close. I did a post at a site called Central Sanity, where I found that the Department of Labor determined that workers under the Trade Adjustment Assistance programs made 77% of their previous wage upon re-entering the work force. A Heritage Foundation report (one of the few times you'll ever find me quoting the Heritage Foundation) and a Government Accounting Office report both state that it's almost impossible to determine the outcomes of these retraining efforts.
Besides retraining factory workers, all workers need continuous education just to keep up with advances in their career fields. The AAP would offer expanded retraining opportunities for the unemployed as well as tax incentives to enable the currently employed to get additional training. One good point the authors come up with is the necessity of:
One gripe I've had with employer-paid training is that employers are increasingly reluctant (with good reason, I suppose) to provide training for any activities that might help you advance in your career field. This is one of my favorite proposals in the entire paper. If I foresee my job and/or employer disappearing, I have a good incentive to train for a new career field ahead of time when the pink slip hits my pay envelope......ending the absurdity of allowing the deductibility of training expense against income taxes only when those expenses are related to a worker’s current job. This is, in effect, a non-adjustment policy – one that provides an incentive to stay put, rather than build skills that would allow a worker to adjust with his or her employer and with the economy as a whole.
We would, as a consequence, recommend expanding the definition of training that qualifies for a deduction from current income taxes. All such expenses should be deductible, whether related to a current job or some prospective future job.
Another recommendation is to set up 401(k)-like Worker Adjustment Accounts. Great. Just one more account to drain my paycheck, like my 401(k), HSA, Dependent Care, etc. accounts.
Unemployment Insurance
The final part of the paper deals with how funding for unemployment insurance benefits could be more progressive, which would allow funding of the wage-insurance, health insurance and educational programs through the AAP plan. Although the authors bring up how unemployment insurance does not cover part-time workers, and does not cover workers who have not worked the minimum amount of time, the AAP does not appear to offer any coverage for these categories. (Unless I'm really missing something.)
Final Thoughts
I laud the authors for offering serious proposals to address worker anxieties. Although the Financial Services Forum is a very prestigious trade group, I'm not sure when or if any of these proposals will be passed into law. Unless our corporate handlers adopt a completely different mindset, the recommendations offered by the authors will probably be the best we can hope for. The proposed AAP program repairs a few of holes in our safety nets, but does nothing to get rid of the underlying job volatility we suffer through.
(Cross-posted at Carrie's Nation.)
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