1. Illustrate with a graph of supply and demand in the market for labor the terms of the wage insurance proposal in the article. Use a graph of the market for labor that is displaced to other countries, and a graph of the market for labor that remains in the US.

There should be a reduction in demand for labor in the displaced market, and an increase in supply in the remaining labor market. The subsidy is half the difference between the initial wage in the former market, and the ending wage in the latter market. Students should note that the reduction in quantity supplied in the former market constitutes the increase in supply in the latter market.

2. Why do you think that this is referred to as "wage insurance?" What makes it like other forms of insurance, such as automotive, home-owner, or health?

Insurance tends to compensate for things that happen outside the control of the recipient. We have homeowner's insurance to guard against damage to our home outside our control, such as an earthquake, hailstorm, or windstorm. Insurance doesn't necessarily guard us against things we can control. Workers cannot control the forces of globalization, and therefore it is appropriate to refer to this proposal as a form of insurance.

3. Subsidies are typically given in the event of market failure; specifically, to compensate for the presence of an external benefit. Is there an external benefit in this article that the subsidy could be compensating for? Explain?

The answer depends on how loosely we look at external benefits. If I lose a job that paid me $10,000 more than the job I am forced to take, that's an overall loss to society. Someone (or many people in the aggregate) is earning $10,000 less in my lost consumption - the multiplier effect of consumption can be considered an external benefit.

Multiple Choice/True False Questions