South-Western College Publishing - Economics  
Wage-Insurance Idea Faces an Uphill Battle
Topic Labor Markets
Key Words wage insurance, globalization, unions, government.
News Story A new idea floating through Congress involves the government subsidizing a portion of the lost wages when a worker loses a job as a result of globalization and ends up taking a job that pays lower wages. Some Democrats love the idea, but others - including organized labor unions - are adamantly opposed.

Research indicates that people whose jobs are lost to global trade end up taking jobs that initially pay about 16% less than what they earned before. Manufacturing wages tend to be about 20% less. One specific proposal would require the government to subsidize 50% of the difference in lost wages for up to a period of two years. As the article indicates, a worker earning $30,000 who loses that job and ends up earning $20,000 would receive $5,000 - half the difference in earnings - for two years.

That's hard to argue with on the face of the proposal. Globalization takes jobs away from people; this is a significant cost of free trade. But unions stand opposed to it because they see the move as a way for firms to offer lower wages to displaced workers. According to one union official in the article, "It's basically about getting workers to take bad jobs quickly." Unions fear the loss of bargaining power for higher wages under such a proposal.

A further problem is funding. How will the government pay for this new program? Some fear that funds will be diverted from existing programs, or that funds simply won't be available when the time comes to enact such legislation.

Discussion Questions:
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.
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?
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?
Multiple Choice/True False Questions:
1. What happens to existing wages when jobs are lost to globalization?
  1. Wages rise because of the resulting increased supply of labor.
  2. Wages fall because of the resulting increased supply of labor.
  3. Wages rise because of the resulting decreased supply of labor.
  4. Wages fall because of the resulting decreased supply of labor.
2. As firms move jobs overseas as a result of globalization, how would you describe the cost associated with workers who are now forced to take lower-paying jobs?

  1. Fixed cost
  2. Variable cost
  3. Sunk cost/li>
  4. Opportunity cost
3. True/False. Globalization takes away jobs from some places and creates jobs in others.

Source Andrews, Edmund L. "Why Wage Insurance is Dividing Democrats." The New York Times, March 18, 2007.
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