Designing a National Strategy for Responding to Economic Dislocation
by Howard F. Rosen, Peterson Institute for International Economics
Testimony before the Subcommittee on Investigation and Oversight House Science and Technology Committee
June 24, 2008
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Figure 2 Unemployment rate and duration, 1960–2007
Figure 3 Firm dynamics, 1995–2004
Figure 4 Mass layoffs, 1996–2007
Workers are the first to feel the negative consequences of economic restructuring due to increased domestic and international competition. They may be asked to cut back their hours or accept lower wages and/or benefits, or they may ultimately lose their jobs. Lori Kletzer finds that almost 40 percent of displaced workers do not find new jobs within a year or two after their initial job loss (Kletzer 2001) (figure 5). Although 40 percent of workers find new jobs, for many their new jobs pay less than their previous ones. Only a little more than 20 percent of displaced workers find new jobs that pay as much or more than their previous jobs.
Job loss can place enormous strain on household finances. The Congressional Budget Office reports that unemployment insurance (UI) played a significant role in maintaining family incomes of recipients who experienced long-term unemployment, particularly for those families that had only one wage earner. Before becoming unemployed, recipients' average family income was about $4,800 per month. UI helped offset the reduction in average family income by 20 percentage points.2
These pressures are not restricted to those workers employed in industries that directly face increased domestic and international competition. Workers employed in upstream and downstream industries may also experience economic dislocation as a result of the effect of increased competition on final goods-producing and service-providing industries. For example, in addition to its production workers, an apparel plant closing might affect textile workers, as well as maintenance and food service workers, designers, cutters, sales representatives, and accountants associated with the production of apparel. Depending on the number of workers laid off from the apparel plant, there may also be a third ripple effect on the broader community. Communities with a high concentration of industry may experience further cutbacks and job losses, as workers and their families spend less money on consumer goods and services.
Mass layoffs and plant closings, and the associated drops in household disposable income, can also hurt a community's tax base, having implications for the provision of government services, including schools, transportation, and health care. In summary, what starts as a "limited" layoff or plant closing affecting a select group of workers can very easily result in successive ripple effects with consequences for an entire community.
Current Policy Responses to Economic Dislocation
Existing government programs designed to cushion the effects of economic dislocation are, for the most part, out-of-date, ad hoc, and inadequate. These programs are often targeted to assist select groups of workers or communities that have some political importance. Overall, these programs are not part of any comprehensive or coherent strategy. This "segmentation "of assistance is not a new phenomenon. Early examples include assistance programs for workers employed by Studebaker and the railroad and meat packing industries in the 1960s (Frank 1974).
Table 1 Unemployment rates by metropolitan statistical area, April 2008
Metropolitan statistical area
El Centro, CA
Yuba City, CA
Ocean City, NJ
Palm Coast, FL
Rocky Mount, NC
Saginaw-Saginaw Township North, MI
Although there may be a political motivation for these targeted programs, the economic justification for them may not be as compelling. There is not much evidence that the adjustment burden placed on workers covered by these targeted programs is significantly different from that experienced by other dislocated workers. In addition to discriminating between groups of workers, these programs create a bureaucratic maze, making it harder for workers to get the assistance they desperately need.
For example, the Catalogue of Federal Domestic Assistance lists 52 programs under the category of "Economic Development," 44 programs under "Community Development" and 60 programs under "Job Training and Employment" (Executive Office of the President, Office of Management and Budget, 2008). Although the information included in the catalog is extremely useful, the catalog is difficult to navigate, and the material is written at a highly technical level. A briefer, more user-friendly version of this catalog could provide invaluable assistance to workers, their families, firms, and communities facing economic dislocations.
The following are examples of some of the more well known programs designed to assist workers, firms, and communities adjust to economic dislocation.
Despite significant changes in US labor market conditions, there have been no major changes in the basic structure of UI since it was established 70 years ago. As a result, UI does not currently meet its initial goals, leaving millions of workers without the assistance they desperately need (Kletzer and Rosen 2006).
UI's original goals were to smooth a worker's income stream by providing income support during periods of unemployment, to provide insurance against the risk of job loss, and to serve as countercyclical stimulus during periods of economic downturns.
Although a federal entitlement, UI is administered by the states, allowing each state to set its own program parameters. On average, workers can receive up to 26 weeks of benefits. The national average weekly benefit in 2007 was $281.17.
The following program indicators suggest that the current UI program falls short in meeting its initial goals:
Restrictive eligibility criteria constitute a large hole in the existing UI program. The current "look back" and job tenure provisions, as well as the exclusion of contingent workers, i.e., temporary and part-time workers, particularly affect low-income workers.4 Thirty-seven states do not provide dependent payment supplements.
After taking inflation into account, the real value of the national average weekly benefit has not changed much over the last 30 years. Nor has it changed much relative to the poverty threshold or average weekly earnings. It has improved relative to the minimum wage only because that was not increased for a decade.
Figure 6 presents the real annualized value of the national average UI weekly benefit relative to the real annualized value of the hourly minimum wage, the poverty threshold for a family of 4 adjusted by inflation, and the annualized value of the real average weekly wage for all workers. On average over the last 35 years, the real value of the weekly UI benefit has been about 40 percent below the poverty rate for a family of four adjusted by inflation, and approximately 44 percent of real average weekly earnings.
In 1970, Congress enacted the Extended Benefit (EB) program with automatic triggers to provide assistance in an orderly fashion during periods of high unemployment. Under the current program, UI benefits can be extended for an additional 13 weeks when the unemployment rate reaches a certain level.
Changes in the labor market, combined with the static nature of the triggers, have produced an extended benefit system that is no longer automatic. As a result, Congress has occasionally found it necessary to extend UI through legislation. Although helpful to millions of workers, these temporary stopgap measures politicize UI, thereby undermining one of the initial goals of the program. These temporary programs have proven to be clumsy, typically being enacted after hundreds of thousands of workers have already exhausted their UI. In addition, the sunset provisions are arbitrarily set and usually fall before employment has recovered. Overall, the nation's UI program has become less automatic and more dependent on Congressional action in response to prolonged periods of economic slowdown.
The federal tax established by the Federal Unemployment Tax Act (FUTA) is currently 0.8 percent on the first $7,000 of annual salary by covered employers on behalf of covered employees. A maximum of $56 is collected annually for each worker who is covered under the program.
There have been few adjustments in the FUTA taxable wage base since it was first established in 1939. The last adjustment was in 1983. Had the taxable wage base been automatically adjusted for inflation over the past 65 years, it would currently be about $45,000.
The following are some proposals to improve UI (Kletzer and Rosen 2006):
Changes necessary to move UI into the twenty-first century require significant federal leadership. The very basic structure of UI must be reformed, broadening it from the single-employer, full-time worker, temporary layoff model to an approach that accommodates permanent job loss, part-time or contingent work, self-employment, and the incidence of job loss and national, rather than local or regional, unemployment. American workers are currently facing considerable pressure due to corporate restructuring, technological change, and increased competition from home and abroad. These pressures are likely to intensify as the economy faces new challenges. Reforming UI is an important step toward providing workers with the assistance they need to adjust to these challenges.
The Workforce Investment Act (WIA), passed in 1998, provides job training and related employment services to unemployed and underemployed individuals. The Act establishes training programs for a wide array of individuals, including, youth, adult, dislocated workers, veterans, and Native Americans. Although all of these programs fall under the responsibility of the federal Department of Labor, they are administered by state and local One-Stop Career Centers. Federal spending on all of these programs was $3.7 billion in FY 2007, of which $1.4 billion was dedicated to dislocated worker training. Of the approximately 260,000 workers who participated in the program in Program Year (PY) 2007, approximately 182,000 workers received core and intensive employment services, and only 77,000 enrolled in training.5
Although designed to assist all dislocated workers regardless of cause of job loss, the number of participants in WIA programs account for only 6½ percent of the annual estimate of dislocated workers. In addition, since the program is not an entitlement, there is no guarantee that workers in need will receive training assistance. Training funds are distributed on a "first come, first served" basis, with little regard for a worker's needs.
Trade Adjustment Assistance (TAA)
TAA provides workers 78 weeks of income maintenance payments, in addition to the traditional 26 weeks of UI, for as long as they participate in training. In addition, the program includes a 65 percent HCTC, a limited wage insurance program, and job search and relocation assistance. Under wage insurance, otherwise known as Alternative Trade Adjustment Assistance (ATAA), workers above the age of 50, earning less than $50,000, can receive half of the difference between their old and new wages, for up to 2 years, subject to a maximum of $10,000. This program is designed to assist the large number of workers who experience earnings losses after reemployment.
In order to be eligible for TAA, workers must have been laid off from a plant for which at least one of the following 3 criteria "contributed importantly" to its decline in employment and sales:
ATAA and HCTC are two examples of how assistance under the TAA for workers program has shifted from traditional income transfers to more targeted, cost-effective assistance. Despite the benefits associated with these new forms of assistance, enrollment in ATAA and the HCTC are disappointingly low. A 2006 GAO study of five large plant closings found that less than half of those TAA eligible workers who visited one-stop career centers were even informed of the HCTC during their visits. A little over half of eligible workers were aware of the ATAA program.
One of the gapping holes in the existing program is that it does not cover all service workers. As recent press stories suggest, American service workers are experiencing dislocations due to international outsourcing. Although some service workers, like computer programmers and accountants, have the necessary tools to ease their adjustment from job to job, other workers, like call center operators and data entry clerks may not, making their adjustment more costly. Congress is currently considering proposals to expand TAA eligibility to cover all service workers.
Although the TAA for workers program has been the subject of some criticism over the years, it has and continues to provide critical assistance to millions of workers and their families as they face probably the most severe financial burden of their lifetime. More than 25 million workers have received assistance under the program since it was established in 1962.
The TAA for workers program works; the problem is that it helps only a minority of potentially affected workers. Only 10 percent of the estimated group of potentially eligible workers receive assistance (figure 7).
Assistance to Firms
Manufacturing Extension Partnership (MEP)
MEP provides a wide spectrum of services, including business support and technical assistance and training, to manufacturing companies throughout the United States. Presently, the MEP program includes 59 centers with approximately 440 locations serving manufacturing establishments across the country. The centers are financed through a partnership between federal and state governments with additional project funding from private industry. The program fosters partnerships with public institutions, including the Small Business Development Centers (SBDC), community colleges, technical colleges and universities, trade associations, local Chambers of Commerce, and organizations focused on economic development. The purpose of the program is to improve the productivity and enhance the competitiveness of US manufacturers. Despite numerous reports of effectiveness, the program's funding has been low and relatively flat over the last few years (figure 8).
The TAA for Firms program has historically been quite small. Between 2001 and 2006, the program assisted approximately 150 firms a year that employed some 16,000 workers. Average spending over the last nine years has been approximately $11 million per year.
Assistance to Communities
Similar to worker assistance programs, community assistance has tended to be targeted to politically sensitive regions and not widely available to all communities. The best example is a program designed to assist communities adversely affected by military base closings.
Department of Defense (DOD) Office of Adjustment Assistance
The DOD Economic Adjustment program has been successful in helping communities in the aftermath of a military base closing. Under the program, the DOD provides intensive technical assistance and funds to help communities prepare strategic plans for economic development. Economic development specialists are assigned to regions to help local public and private leaders design and implement their strategic plans. The specialists also help local communities identify and apply for federal and state assistance.
In 1998, in response to the Levi Strauss plant closing in Roswell, New Mexico, Senator Bingaman initiated a series of steps aimed at assisting the workers and the community modeled after the DOD's base closing program (Rosen 2001. The Levi Strauss plant was Roswell's largest single employer, and as a result, the economic impact of the plant closing was felt throughout Roswell and the surrounding communities.
Senator Bingaman's plan included the following elements:
It is difficult to evaluate the impact of these measures, since the effort was disbanded prematurely due to political factors. Individual elements of this initiative have subsequently been tried in response to other plant closings. Congress is currently considering a TAA for Communities program, modeled on Senator Bingaman's efforts in response to the Levi Strauss plan closing in Roswell.
Ironically, funding for most of these programs has declined, despite increased pressures on the US economy, resulting in greater demand for these programs' services. At 0.05 percent of GDP, federal spending on employment and training programs is at its lowest rate in almost 45 years.6 Federal spending on community development programs was also 0.05 percent of GDP in 2006, down considerably from its peak of 0.18 percent of GDP in 1980 (figure 9).
The National Economic Adjustment Rapid Response (NEARR)
Developing a comprehensive national strategy to respond to economic dislocation would require four steps:
The National Economic Adjustment Rapid Response (NEARR) would be based on the following principles:
Any response to economic dislocation needs to be built on the foundation of encouraging investment in new or expanding existing plants and equipment, in order to create high-skilled, high-wage jobs. At 10 percent of GDP, current investment in plants and equipment is significantly below its 50-year trend (figure 10). Inadequate investment hurts the prospect of raising productivity that in turn affects the creation of high-skilled, high-wage jobs. Sustainable increases in productivity growth are necessary in order to achieve long-run improvements in living standards.
Ironically, over the last several years, adjustment assistance programs targeted to small groups of workers and communities have been expanding, while general programs designed for those facing severe economic dislocation have become more out-of-date and inadequate. Any national strategy should be designed to provide adequate assistance to all workers, firms, and communities facing economic dislocation, regardless of cause.
The existing "one size fits all" worker assistance programs need to be reformed in order to make them more flexible and tailored to the needs of individual workers and local economic conditions. One way to achieve this goal would be to allow workers to formulate their own assistance program from a menu of various forms of assistance, including income maintenance payments, training, employment services, wage insurance, health insurance assistance, as well as job search and relocation assistance.
Reemployment services, including job banks and resume-writing and interview workshops, have proven to be extremely cost effective. These efforts should be expanded and made available to workers prior to layoffs. Training may be necessary for workers with little prospect of returning to their original occupation. Programs aimed at encouraging on-the-job training (OJT) should be promoted, since by definition this form of training is most closely related to reemployment. Dislocated workers should be able to take advantage of the myriad of education-related financial assistance programs available to college-age students.
Providing technical assistance to firms facing intensified domestic and international competition may prevent, or at least minimize, economic dislocations. MEP and the TAA for Firms programs are effective but have limited reach. These kinds of programs should be expanded and made available to all firms, regardless of location, industry, or cause of economic dislocation. These programs should also be integrated into worker and community adjustment programs.
Designing a community adjustment program should begin by borrowing from the DOD's base closing program. This program currently assists communities develop and implement a strategic plan for responding to severe economic dislocation, as well as helps communities identify and apply for appropriate federal and state grants and loans.
Communities are rarely "prepared" for significant economic dislocations. For example, most communities do not have the capacity and expertise to assess the needs of workers and assist them in designing their own adjustment plans. Since it is inefficient for each community to develop and maintain this kind of resource, the federal government might establish economic dislocation "swat teams" to provide logistical assistance to communities in a timely fashion. These teams would be assigned to communities in need, moving on once they complete their tasks.
Communities need to have the necessary and adequate infrastructure in order to provide effective training. Since communities may not experience large-scale layoffs often, they may not have resources necessary to meet workers' training needs. For example, training facilities, like community colleges, may not have sufficient room and equipment to accommodate large increases in enrollment. Addressing these considerations should be part of any comprehensive adjustment program.
In order to insure that a community's adjustment efforts are coherent and that all the pieces are fully coordinated, it might convene a group of federal, state, and local government officials, as well as private sector representatives. The group might include local representatives from unions, community colleges, religious and social service organizations, and other nonprofit groups, as well as regional coordinators of federal assistance programs, like the Economic Development Administration and the Employment and Training Administration. This group can potentially play an instrumental role in the development and implementation of the community's strategic plan for responding to the economic dislocation it is experiencing.
In some instances, firms may provide their own assistance to laid-off workers and local communities. Firms should be encouraged to voluntarily provide this type of assistance, since it is difficult to mandate. The local board described above might help coordinate and leverage the various forms of public and private assistance.
Pressures facing American workers, firms, and communities resulting from increased domestic and international competition are not likely to dissipate any time soon. On the contrary, they are likely to continue intensifying. Existing programs designed to assist workers, firms, and communities respond to economic dislocation are ad hoc, out-of-date, and inadequate. These piecemeal efforts tend to be "too little, too late," placing an additional burden on workers, firms, and communities.
The lack of a national strategy designed to respond to economic dislocation is contributing to political backlash against further trade liberalization and the introduction of new technologies. The growing resistance to economic change could jeopardize future increases in economic growth and risk long-term improvements in US living standards.
Economic flexibility brings costs and benefits. Movement out of activities that require low skills and pay low wages and into activities that require high skills and pay high wages can improve overall productivity providing benefits to all Americans. On the other hand, this movement can place a significant burden on workers, firms, and communities. Easing this adjustment burden through public and private efforts may reduce opposition to economic change.
Establishing a comprehensive and integrated National Economic Adjustment Rapid Response, primarily based on updating and expanding existing programs, may be a first step toward responding to the economic dislocations being experienced through the United States.
Executive Office of the President, Office of Management and Budget. 2008. Catalog of Federal Domestic Assistance. Washington: Government Printing Office
Frank Jr., Charles. 1974. Foreign Trade and Domestic Aid. Washington: The Brookings Institution.
Kletzer, Lori, 2001. Job Loss from Imports: Measuring the Costs. Washington: Institute for International Economics.
Kletzer, Lori G., and Howard F. Rosen. 2006. Reforming Unemployment Insurance for the Twenty-First Century. The Hamilton Project, Discussion Paper 2006-06 (September). Washington: The Brookings Institution.
Rosen, Howard. 2001. A New Approach to Assist Trade-Affected Workers and Their Communities: The Roswell Experiment. Journal of Law and Border Studies 1:1.
1. Layoffs affecting 50 or more workers is considered a mass layoff.
2. Long-term recipients are defined in this report as unemployed workers who received UI benefits for at least four consecutive months in 2001 or early 2002.
3. Author's calculations based on Department of Labor data.
4. Some workers associated with temporary placement agencies may receive UI. Twenty states currently do not cover part-time or temporary workers.
5. Budget data are presented according to fiscal year (October to September) and participate data are collected according program year (April to March).
6. Federal spending on employment and training peaked at 0.46 percent of GDP in 1978 and 1979.