Economic Trends
By Charles J. Whalen
Easing the Pain of a Pay Drop
As the economy sputters, worker anxiety is increasing. The biggest concern for many who lose their jobs is not that another post will be hard to find; rather, it is that a new job may mean a pay cut. According to the Labor Dept.'s latest Displaced Workers Survey, conducted last year, one-quarter of the reemployed reported earnings losses of 20% or more.
To ease the anxiety--and financial pain--of a job loss due to changing economic conditions, a new Brookings Institution report by two think-tank economists introduces a plan they call "wage insurance." Their idea: have government make up part of the wage loss experienced by a displaced worker who takes a pay cut to get back to work. "Our proposal fills a real policy gap--it helps workers after they get a new job," says visiting fellow Lori G. Kletzer of the Institute for International Economics, co-author of the plan with Robert E. Litan, vice-president at Brookings.
Using the latest survey of displaced workers, the authors calculate that their plan would have cost $2.6 billion in 1999, when unemployment was 4.2% (table). That amount would replace 50% of an eligible worker's loss up to $20,000. "It turns out that it's not that costly," says Kletzer, who notes that unemployment insurance costs $20 billion each year.
Kletzer and Litan would make wage insurance available to any full-time employee holding a job with the same company for two or more years before displacement, since earnings losses tend to be largest for workers who were at the same company for a number of years. But the funds would be available for only a two-year period, starting when a job is lost. That gives workers "an incentive to get employed more quickly," says Kletzer, who adds that the idea received support last November from the bipartisan Trade Deficit Review Commission, a panel appointed by Congress to study trade and its effect on workers and the economy. Wage insurance would be particularly helpful in the current slowdown, with more and more workers being displaced, especially from high-tech companies.
The Wage Insurance Price Tag
IF THE UNEMPLOYMENT RATE IS: 4.2% 4.9%
AND ELIGIBLE DISPLACED WORKERS TOTAL: 650,000 800,000
WAGE BENEFITS WOULD COST *: $2.6 $3.5
billion billion
* Replaces 50% of a worker's lost earnings, up to $20,000 annually
Data: Kletzer and Litan
Trustbusting on the Upswing?
The conventional view among economists is that antimonopoly enforcement will decline in the next few years. For one thing, Republicans don't go after antitrust abusers as vigorously as Democrats do, they believe. They also argue that the number of antitrust cases filed rises in boom times and drops when the economy slows. The reasoning goes like this: When profits are up, regulators find it more politically acceptable to bring charges.
But these views are being attacked by economists Vivek Ghosal of the Justice Dept.'s Antitrust Div. and Joseph C. Gallo of the University of Cincinnati, writing in the International Journal of Industrial Organization. Using data from 1929 through 1994, they show that the number of antitrust cases actually rises in a downturn. They also find that whether Republicans or Democrats are in power has no impact on the level of case activity. That means antitrust enforcement actions may be about to increase despite the professed probusiness views of the Bush Administration.
Ghosal and Gallo argue that antitrust is no different from most other types of law enforcement: Cases rise when violations go up. And when times get tough, with profits on the wane, companies collude to fix prices more often than during prosperity. The authors' most detailed findings are for 1955-1994. During that period, enforcement went up about two years after the economy started to slow, a lag due in part to time needed to investigate a complaint before filing a case. If unemployment rose by two percentage points, cases increased by 30%, says Ghosal, who notes that an average of 32 cases were filed each year in the 1955-1994 period. Gallo, who has done additional research using data since 1994, adds that the conclusions "still hold up" with more recent data.
A Call to Triple the Tax Cut
Until now, it seemed, the Democrats were united in the idea that taxes should be cut far less than the $1.6 trillion the Bush Administration proposes for the next 10 years. But two new reports from economists at the liberal Jerome Levy Economic Institute argue that large and growing federal budget surpluses are an enormous drag on the economy--and that, in fact, the Bush plan is much too small. Both reports, one by Wynne Godley and the other by Dimitri B. Papadimitriou and L. Randall Wray, call for cuts that are three times what the White House wants. And that's a conservative number, says Wray of his $4.8 trillion proposal: "It could easily turn out to be too low."
What worries Wray and his colleagues is that business and consumer spending, buoyed by record levels of borrowing, will fall sharply as the economy stalls. That spending drop will be especially painful because economic growth is already constrained by huge and growing federal budget surpluses, revenue excesses that the Congressional Budget Office projects will rise from 2.4% of gross domestic product in 2000 to 5.3% of GDP in 2011 unless taxes are cut (chart). The result could be a serious and long recession, the authors say.
The plan by Papadimitriou and Wray, which includes the Bush cuts but adds payroll-tax relief and expands credits for families, is designed to help the economy now and in the future. In the near term, it offers about $450 billion a year to offset the expected cutback in household spending during the next few years. Over the course of the decade, it brings government revenue in line with public outlays so surpluses don't continue to weigh down the economy.
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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