Statement of The Honorable Robert Reich, J.D., Professor of Public Policy, University of California, Berkeley

Testimony Before the Subcommittee on Income Security and Family Support
of the House Committee on Ways and Means

March 15, 2007

Mr. Chairman and Members of the Subcommittee:

Economic insecurity is now endemic. Fear of job loss, and accompanying fear of loss of income as well as loss of employer-provided or sponsored health care, affects almost every member of the American workforce. What can and should be done? The first step is to understand that the problem is very different from what we’ve faced before.

The New Problem of Insecurity: From Cyclical Change to Structural Change

It used to be that the main cause of economic insecurity was temporary and often short-term job loss during economic downturns. But downturns in the business cycle have become shallower. Indeed, the business cycle itself has become smoother than it was decades ago, and neither recession nor inflation as threatening. This is due, in part, to better management of the economy by the Federal Reserve Board, improvements in the quality and quantity of information available to the private sector in planning investment decisions, just-in-time inventory control systems, and the ease with which spare capacity can be found abroad.

But structural changes in the economy have become more dramatic. Shifts in supply and demand are often sudden and large. That’s because globalization and technological change are generating continuous waves of new products and services. The entry of China and India into global trade and investment has in effect expanded the global labor force about 70 percent – mostly at the lower end of the wage scale. But even if America was so unwise as to try to retreat from rest of world behind protectionist walls, job and wage security would still be a thing of the past. Computer software is now capable of doing many of the jobs people used to do: Numerically-controlled machine tools and robots do much of the factory work that used to be done by workers on the line; software also does much of the clerical work that used to be done inside offices by secretaries and lower-level white-collar workers. The answer to “what happened to that job?” is as often “it’s being done by software” as “it’s being done elsewhere.”

Meanwhile, consumers and investors are gaining easier and easier access to information about better deals, and easier means of executing such deals. The result is almost continuous economic upheaval on a scale never before experienced. Consumers and investors switch allegiances at the speed of an electronic impulse. That makes the market extraordinarily efficient at getting them what they want, when they want it. But the corollary is that just about every business in every industry is continuously at the mercy of consumers and investors who may abandon it in pursuit of better deals. Employees, whose pay and benefits typically constitute 70 percent of the cost of doing business, are especially vulnerable. While capital is more mobile than ever, most people who work for a living are relatively immobile. They live and work in specific jobs, with specific skills, in specific places, often with families whose members also have specific connections to those places.

Decades ago, most jobs were fairly permanent and earnings were predictable because the economy was based largely on high-volume, standardized, stable mass production. Stability of work and wages were necessary for economies of scale  to be achieved. A handful of firms dominated each industry, because there was only room for a that handful Competition was minimal. Consumers and investors had little choice of products or services. A sufficiently large portion of jobs were unionized (in the mid 1950s, more than a third of America’s workers belonged to a union), that unionized contracts established prevailing wges and working conditions throughout the economy. Periodically, this stable system would succumb to recession and large numbers of workers would be temporarily laid off, until aggregate demand picked up, and they were hired back. The very term “layoff” suggested its temporary nature. Employees were “laid off” until they were back “on” the payrolls.

Fast forward to 2007. Today, almost every job is temporary – even if it’s called “permanent.” And for the vast majority of workers, earnings are unpredictable. Pay now depends on number of hours of overtime, billable hours, commissions, profits, bonuses, or some other variable measure of the unpredictable demand for their employment. Instability has become an inherent part of the structure of the economy. A recent CBO analysis shows that between 2001 and 2002, one in four workers saw their earnings increase by at least 25 percent while one in five saw their earnings drop by at least 25 percent.¹ Workers who lose their jobs permanently typically get new paying 16 percent less than the old. For displaced manufacturing workers, the typical drop in earnings has been 20 percent. In certain industries, wage losses are even greater. Workers who have lost jobs in the tire and blast furnace industries have experienced average wage losses of over 45 percent.²

The Panel Study of Income Dynamics at the University of Michigan, which has tracked 65,000 people since 1975, has found that over any given two-year stretch about half of all families experience some decline in earnings. Although many make up for such losses later on, the swings have become progressively larger as the decades have passed. In the 1970s, a typical decline was about 25 percent. By the late 1990s, it was 40 percent. By the mid-2000s, family incomes rose and fell twice as much as they did in the mid-1970s, on average.³

Polls show a substantial increase over recent decades in the percent of Americans worried about losing their jobs.⁴ Last year, the fifth year of an economic recovery, some 4.5 million Americans, on average, left their jobs or were fired every month, and some 4.8 million people started new jobs every month. Presumably some of these people chose to change jobs. They relished the change of pace, the new opportunities, and the excitement of all this tumult. Presumably some would have preferred to stay where they were.

But we also assume that a not insignificant number had difficulty finding a new job. They may have had to change industries, develop entirely new skills, or move to a new location. All this took time. Over the last twenty years we’ve witnessed a substantial increase in the rate of long-term joblessness. During this interval they may have drained their savings, or put them and their families deep in debt. Chances are, even if they qualified for unemployment insurance, they exhausted it before they found a new job. Typically, they had difficulty finding the training they needed for the new job, or couldn’t support themselves and their families while getting the training. And they had to accept a new job that paid significantly less than the job they lost.

Upheaval can be stimulative when the electricity bill can be paid and there’s enough food in the refrigerator. It is considerably less welcome when the kids have to go hungry, even temporarily.

The Current Employment Transition System Is Outmoded and Broken

The American labor market has among highest rates of job turnover of any wealthy economy. That’s one if its great strengths. But our current system for easing job transitions is the weakest of all wealthy nations. That’s one of our economy’s most significant weaknesses. Employment transition includes an unemployment insurance system that reaches fewer than 40 percent of people who have lost jobs; a retraining system that’s so piecemeal, unresponsive, and underfunded it hardly merits the term “system;” and, as a practical matter no real re-employment insurance at all. Taken as a whole, Americans who lose their jobs get almost no help toward gaining new jobs that pay at least as well as the old.

There are many reasons why comparatively few unemployed workers receive unemployment insurance. One is they don’t know they’re eligible for it. Unions once played a major role in disseminating information about the availability of unemployment insurance, but now that only 7.4 percent of private-sector workers are unionized, they cannot play this role. Another reason is that far women are in the labor force today than before, and many of them are working part time in order to preserve enough time to take care of children or parents. Women are still the major unpaid caretakers of American society. But certain states deny unemployment insurance to people who have lost part-time jobs. Another reason is that the job-holder is working several part-time jobs simultaneously, and the eligibility rules of that state don’t recognize that the loss of one or more may impose a substantial hardship. Or it may be that even though the worker had been employed full time, he or she didn’t earn enough to qualify for unemployment insurance under the rules of certain states. Or it may be that someone has to leave a job in order to accompany a working spouse to another city or state, and is deemed ineligible because that job loss is not considered to be involuntary.

The point is that the current unemployment insurance system is full of holes because it was designed for a time when almost all workers had full-time jobs with predictable wages, when relatively few women were in the workforce, when most families did not depend on two incomes, and when unemployment was due to a temporary downturn in the business cycle. None of these conditions holds true any longer. So it’s no surprise that the system is failing.

Meanwhile, our system of job training is woefully underfunded, and remains a patchwork of programs put together for the convenience of government agencies and congressional authorizing committees rather than people who need help. The Workforce Investment Act of 1998 is an improvement on the Job Training Partnership Act that preceded it, and the idea of one-stop shopping for workers who have lost their jobs and need an array of re-employment services is a good one. But community colleges are not included – although community colleges often provide among the most important sources of retraining. Nor is the job-training system sufficiently integrated with unemployment insurance so that people who lose their jobs and need retraining to get new jobs that pay at least as well as the one they lost can count on income assistance while they retrain. Nor, most fundamentally of all, has nearly enough money been authorized and appropriated under the Act for all the training – both the quality and the duration – that a workforce in such rapid transition needs.

Trade Adjustment Assistance is theoretically available to supplement unemployment insurance for those who lose their jobs because of trade, but as a practical matter it is often impossible to separate out the reasons for job loss, and difficult and time-consuming to prove that one is entitled to benefits and training under the TAA program. Nor does it make any sense to separate out workers who have lost their jobs because of trade from those who have lost it because of displacement by technology or some sudden shift in demand.

Despite reform in 2002, Trade Adjustment Assistance is helping fewer than 75,000 new workers each year, while denying over 40 percent of employer’s petitions. The Department of Labor, which I used to run, has interpreted the TAA statute so restrictively as to exclude the growing number of service workers who have been displaced by trade. The Department is denying TAA benefits to roughly three-quarters of workers who are certified as eligible for them. Moreover, like the Workforce Investment Act, TAA funding has been woefully inadequate. Two-thirds of newly certified workers do not receive any training benefits at all.

The Current Debate – Preserve the Old Job vs. “Let-er-Rip”

What to do? Most of our debates over what to do about the rising tide of economic insecurity occur between two ideological schools, neither of which provides any practical hope of dealing with the situation most Americans now face. One the one side are those who urge that America preserve and protect existing jobs. They advocate trade protection for jobs threatened by workers overseas, and laws curbing global outsourcing. They often seek government subsidies for industries whose jobs are threatened by competition – domestic as well as international. Occasionally the members of the “preserve and protect” school want regulations that keep new technologies at bay and require that businesses continue to hire workers for jobs that the technologies otherwise would displace. Members of this school are not, in general, enthusiastic about job training, on the theory that there are few if any new jobs to be trained for – a battle-cry they often express as “training for what?” And they are wary if not hostile to wage insurance, fearing that it is inevitably a means of reducing the scope and duration of unemployment insurance, and little more than grease on the slide of downward mobility.

Opposed to this preserve and protect school of thinking is what might be termed the “let-‘er-rip” school, which sees the workings of the “free market” as so sublime that any government effort to take account of social costs is automatically deemed an “interference” almost guaranteed to “distort” the market. For subscribers to this school, any move to cushion workers against the shocks of economic change will encourage laziness or lassitude on the part of those so helped. Unemployment insurance inevitably slows the rate at which the unemployed find new jobs because, according to this thinking, it reduces the pain that provides a prod to find a new job, or allows a worker to indulge in the fantasy that the old job will return. Help with job training is also assumed ill-advised, on the theory that the only training that matters occurs on the job, when a newly-hired worker is sufficiently fearful of losing the new job that he or she has a strong incentive to learn everything necessary to perform it well. Wage insurance, by this view,

is also wasteful and inefficient because it reduces any immediate incentive to work harder and put in longer hours.

Neither of these positions is tenable. America cannot preserve and protect old jobs. Even to try to do so would impose an extraordinary cost on the nation, forcing Americans to sacrifice the significant benefits that come with globalization, technological change, and a wide choice of goods and services. But nor can we allow the market to subject so many Americans to wanton economic insecurity, pain, and fear of job loss and income decline. There is nothing sacrosanct about the “free market.” The market is a manmade creation; it exists because of laws that define and redefine private property, fair exchange, reasonable liability, and require minimum standards of fair dealing, disclosure, and protection for consumers, investors, and employees. Whether we call the real pain of economic change as a “social cost,” an “economic externality,” or a human problem, it is very real, and it is becoming larger. It must be addressed, and be reduced.

In sum, neither position is tenable. Those who wish to preserve and protect ignore the structural changes that are now engulfing the economy. Those who want to let the market “rip,” ignore the pain that these changes are inflicting. To the extent our politics endorses one or the other of these positions, we will have difficulty meeting the challenge ahead.

The Need for a New Employment Security System: The Three-Legged Stool

The best and only practical solution is through active labor market policies that ease the transition of our workforce out of old jobs and into new ones that pay at least as well as the old. The goal, in other words, cannot be job security because no job can be secure; and it cannot be the insecurity that comes with the sort of structural changes we are experiencing, because that puts too many people in jeopardy. The goal must be, rather, employment security – the security that comes in knowing with a high degree of confidence that even though the current job and wage cannot be counted on forever, there’s a high likelihood of finding new employment at the same or higher wage.

Such an employment security system would require, in my view, at least three things: 1. Income support while unemployed; this requires, at the least, filling the holes in the current unemployment insurance system. 2. Easy access to training and skill development that leads to a new job paying at least as much as the old. 3. Wage insurance during the transition period – providing workers who can only find a new job paying less than the old with a portion of the difference in pay – long enough that workers can begin learning on the job and improving their skills and productivity, well on the way to matching or exceeding the pay on their former job.

Think of it as a three-legged stool. If any one leg is missing, the support is inadequate. If the current holes in the unemployment insurance system remain unfilled, wage insurance alone is likely to mean downward mobility for too many workers who have lost their jobs and must quickly find new ones in order to maintain their incomes. Without adequate unemployment insurance, workers lack the ability to undertake a full and adequate search for a new job. That means, in too many cases, a new job with much lower wages than would be the case if the job search were longer. Indeed, studies show that workers who collect unemployment insurance enjoy an increased likelihood of finding a new job that will have employer-sponsored health insurance.⁵ Another study has found that workers who receive unemployment benefits receive higher pay, as well, by a factor of $240 a month compared to those who do not collect unemployment benefits.⁶ Hence, wage insurance should not undermine funding and support for necessary reforms of unemployment insurance. It should not be viewed as a “work first” requirement, and it should be be designed in such a way as to be entirely compatible with job training.

On other hand, if workers only have access to unemployment insurance and not to wage insurance, then they may well reach the end of their unemployment benefits and be forced to settle for jobs paying far too little for them to be able to maintain the standard of living they and their families had before the job loss. Wage insurance is critical in helping them stay on the new job long enough to gain sufficient experience and on-the-job skill to justify wage that’s near or matching the wage of the job that was lost.

But on-the-job training and experience is seldom adequate, especially if the worker who loses a job has to find a new one in a new industry or occupation. If workers have access to unemployment insurance and wage insurance but not to job training, there is little reason to suppose – given the pace of structural change in the economy – they will find a job paying as well as their old job. Finally and most obviously, if they are eligible only for training, but not for unemployment benefits or for wage insurance, then many will not be able to take advantage of the training because they cannot afford the loss of income such training would entail.

In sum, each leg of the stool is important for allowing workers who have lost their jobs to balance the three things they need most – income support during their search for a new job, income support during training for a new job, and a wage supplement at the start of the new job while they gain on-the-job training and experience. 

Mending the Holes in Unemployment Insurance

The proposed legislation makes a good start at mending the current holes in unemployment insurance. It makes sense to create incentives that provide extra funding from the Federal Unemployment Account to states that meet specific criteria such as:

– Counting applicant’s most recent wages (from last completed quarter) when determining eligibility for UI benefits. Workers who lose their jobs shouldn’t have to wait three months before getting unemployment benefits. Computerized information available to most state unemployment offices should be adequate to accomplish this.

– Insure part-timers. States should not deny unemployment insurance to an individual solely because that person is seeking part-time work. Some states still require recipients to seek full-time employment even if they can only work part time. This makes no sense, and fails to account for the changes in the structure of the economy to which I alluded, above.

– When determining UI eligibility, permit good cause allowance for voluntary employment separations that related directly to compelling family reasons such as avoidance of domestic violence, caring for a disabled family member, and following a spouse whose employment has been relocated. This is also a sensible reform. There are wide disparities among states on good cause allowances for voluntary separations. Given the changes in the economy, and in the structure of families, the current system in many states imposes an unreasonable burden on too many families.

Encouraging Job Training and Education – Off and On the Job

Job training – both on and off the job – should be an important component of any new employment system. Numerous studies have documented the economic value of job training, especially longer-term training in programs designed to prepare workers for jobs that employers are actively seeking to fill, for which they are likely to continue to need employees. On-the-job training is critically important as well; it has been estimated that for ever dollar invested in on-the-job training yields an additional 13 cents in annual earnings for the working lifetime of the individual; the return is 19 percent for workers without a college degree.⁷

– Lifetime training. The Workforce Investment Act is underfunded, relative to the palpable needs of our workforce in an economy subject to significant structural change. I would also urge Congress to consider imposing on employers – especially those employing more than, say, 100 employees – a requirement that they invest at least one and a half percent of their payrolls into the continuing education and training of all their employees. Any portion of this percentage that is not so used should be paid into local Workforce Investment Act funds.⁸

– Training assistance benefits to claimants who have exhausted their regular unemployment insurance. States should be urged to provide such funding so long as recipients are making satisfactory progress in a state-approved training program related to a high-demand occupation. The proposed legislation would require that weekly cash benefits be the same as benefits provided under regular unemployment insurance, which seems reasonable to me. I would urge that states have discretion as to duration, but that the duration of such training assistance should be at least 26 weeks.

– Wage insurance that effectively subsidizes on-the-job training on the new job.  One of the most important rationales for wage insurance is that it recognizes that workers who are new at a job or an occupation gain value as they gain experience, and often learn relevant skills, on the job – eventually justifying a higher wage. In this respect, wage insurance can and should be understood as a temporary subsidy for on-the-job training.

Insuring Wages

– Replace half a worker’s lost wages compared to previous employment for up to two years, and up to total of $10,000 per year. The proposed legislation calls for this, and it seems reasonable to me, although replacement rates may have to be higher for workers who earn less than half the median income.

– Make the insurance available to all permanently displaced workers who have at least two years of tenure at the previous job, and whose new job is a full-time job. This also strikes me as reasonable – the requirement of a new full-time job would avoid any possible incentive to reduce hours of work.

– Consider making it available on a pro rata basis to part-time workers who move on to new part-time jobs that require the same hours but pay less. Given the practical realities of work in the current economy – especially as they relate to women – I would urge the Subcommittee to consider making the insurance available on a pro rata basis to part-time workers who move on to new part-time jobs that pay less than their former part-time jobs, as long as the number of hours in the new job is the same as that of the old one.

The Longer Term: A More Ambitious Agenda

The three-legged stool of income support, training, and wage insurance is a beginning. If our workforce is to have the flexibility it – and our dynamic economy – needs, other innovations will be necessary.

Universal and affordable health insurance. For most Americans, economic insecurity is intimately connected to the fear of loss of health insurance, because employer-based health insurance continues to be the major vehicle through which health insurance is dispensed in America. But this system makes less and less sense. It amounts to a tax subsidy estimated to be in the range of $160 billion a year. Yet people who need it most – who have lost a job, either because of their own health problem or a health problem in their family made it difficult for them to continue – have no access to it. And poorer workers tend to receive a much smaller portion of this tax subsidy – sometimes no health insurance at all – than top executives, whose employer-provided health insurance for them and their families is often quite generous. It makes eminent sense, therefore, to decouple health care from employment and apply the $160 billion to the cost of providing universal and affordable health care.

American employers are on the way to decoupling health insurance from employment in any event. The proportion of large and medium-sized companies offering full health coverage for their employees dropped from 74 percent in 1980 to 18 percent in 2005. As recently as 1988, two-thirds of medium-sized employers provided health insurance to their retirees; by 2005, the portion had fallen to around a third. ⁹

Paid Family and Medical Leave. Another feature of a more ambitious agenda would be paid family and medical leave. All too often, a family’s economic security is jeopardized by the need for a family member to provide temporary care for a child or a parent or other relative. The nation’s current Family and Medical Leave system, requiring employers to provide twelve weeks of unpaid leave for family and medical emergencies, has proven to be a large success; but many families are unable to take advantage of it because they cannot afford to forfeit income during the time away from work. Before the Act was passed and signed into law, in 1993, employers predicted a wave of fraudulent leave-taking, arguing that even without pay, large numbers of employees would take advantage of the Act and take days or weeks off of work whenever they chose to, on the pretext of a family emergency. That has not been the case. The vast majority of American workers want to work and need to work. They also need to be able to attend to family and medical emergencies when they occur. Congress should follow California’s example and establish paid leave, running along side the unemployment insurance system.

Housing Transition Assistance. I would also urge Congress to consider including housing transition assistance for workers in towns and cities from which major employers have left. Given the upheavals in the economy, the housing stock in places that suffer from falling employment over a period of years often loses substantial value. Meanwhile, the value of housing in towns and cities where employment is growing often rises considerably. Research has shown that a doubling of employment in a metropolitan area is associated with a 33 to 55 percent increase in owner-occupied housing prices.¹⁰ Given that one’s house is often the family’s largest single asset, this mismatch can make it particularly difficult for Americans to leave a town or city where they have lost a job and move to a town or city where new jobs are available.

Housing transition assistance could take many forms, including using a limited portion of unemployment insurance funds to provide below-market loans for workers leaving towns or cities where housing prices have fallen and moving in search of work to towns or cities where housing prices have risen. Some states have created “home protection funds,” providing revolving loans that save homes from foreclosure and help maintain their communities.

Conclusion

I commend the Subcommittee for the proposed reforms in unemployment insurance and the creation of wage insurance. These are important starts on one of the most important challenges facing the American economy today – providing our people with enough security to accept the changes that will inevitably affect almost every job in every industry – and, hopefully, prosper in the economy of the twenty-first century.

¹ The CBO analyzed data from the 2001 panel of the Bureau of the Census’s Survey of Income and program Participation. Workers with less education tend to experience more volatility in their earnings than do workers with more education. See CBO, Changes in Low-Wage Labor Markets Between 1979 and 2005 (December, 2006).

² See Lori Kletzer, “Trade-Related Job Loss and Wage Insurance: A Synthetic Review,” Review of International Economics 12(5), 2004.

³ See Panel Study of Income Dynamics, University of Michigan, various years. See also Mark Rank, One Nation Underprivileged: Why American Poverty Affects Us All (New York: Oxford University Press, 2004), p. 93; Jacob Hacker, The Great Risk Shift (New York: Oxford University Press, 2006).

⁴ See, for example, Pew Social Trends Poll, August 30, 2006. A representative sampling of Americans was asked: “Compared to 20 or 30 years ago, do you think the average working person in this country...has more job security, less job security, or about the same amount?” Results: More job security, 11 percent of respondents; less job security, 62 percent; about the same, 24 percent; don’t know or refused to say, 3 percent.

⁵ Boushey, Wenger, “Finding the Better Fit: Receiving Unemployment Insurance Increasese Likelihood of Re-Employment with Health Insuracne,” Economic Policy Institute, April, 2005.

⁶ Kiefer, Neumann, “An Empirical Job Search Model with a Test Constant Reservation Wage Hypothesis,” Journal of Political Economy, Vol. 87, No. 1, 89-107.

⁷ See Rosen, “Taxation and On-the-Job Training Decisions,” The Review of Economics and Statistics vol 64 (3), pp. 442-449.

⁸ The diligent reader with a long memory will notice that this idea first appeared in Bill Clinton and Al Gore, Putting People First (Times Books, 1992), p. 128.

⁹ National Compensation Survey: Employee Benefits in Prigvate Industry in the United States (U.S. Department of Labor, Bureau of Labor Statistics, March, 2006).

¹⁰ Hwang, Min and Quigley, Economic Fundamentals in Local Housing Markets” Evidence from U.S. Metropolitan Regions,” Journal of Regional Science, vol 46 (3), pp 425-453, 2002.