Elevator pitch
Job displacement represents a serious earnings risk to long-tenured workers through lower re-employment wages, and these losses may persist for many years. Moreover, this risk is often poorly insured, although not for a lack of policy interest. To reduce this risk, most countries mandate scheduled wage insurance (severance pay), and it is voluntarily provided in others. Actual-loss wage insurance is uncommon, although perceived difficulties may be overplayed. Both approaches offer the hope of greater consumption smoothing, with actual-loss plans carrying greater promise.
Key findings
Pros
Actual-loss insurance is the theoretical ideal, promising complete smoothing of consumption following job displacement.
Tenure-linked severance pay serves as scheduled wage insurance, helping offset re-employment wage losses.
Savings accounts may provide an alternative to insurance if the latter’s inherent moral hazard problems are severe.
Cons
Theoretical concerns about actual-loss insurance are manifold, and include measurement and moral hazard concerns.
Tenure-linked severance benefit schedules only crudely track actual wage losses.
Improvement in severance benefit schedules, say by introducing additional loss factors (e.g. general eco-nomic conditions), might be difficult.
Savings accounts are inferior to insurance if, as with job displacement of long-tenured workers, the event involves a small probability of a large loss.