[Joint House and Senate Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-118
 
              MEETING THE CHALLENGE OF INCOME INSTABILITY

=======================================================================


                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 28, 2007

                               __________

          Printed for the use of the Joint Economic Committee


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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Charles E. Schumer, New York,        Carolyn B. Maloney, New York, Vice 
    Chairman                             Chair
Edward M. Kennedy, Massachusetts     Maurice D. Hinchey, New York
Jeff Bingaman, New Mexico            Baron P. Hill, Indiana
Amy Klobuchar, Minnesota             Loretta Sanchez, California
Robert P. Casey, Jr., Pennsylvania   Elijah E. Cummings, Maryland
Jim Webb, Virginia                   Lloyd Doggett, Texas
Sam Brownback, Kansas                Jim Saxton, New Jersey
John E. Sununu, New Hampshire        Kevin Brady, Texas
Jim DeMint, South Carolina           Phil English, Pennsylvania
Robert F. Bennett, Utah              Ron Paul, Texas

                Chad Stone, Executive Director (Acting)
             Christopher J. Frenze, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                      Opening Statement of Members

Statement of Hon. Charles E. Schumer, Chairman, a U.S. Senator 
  from New York..................................................     1
Statement of Hon. Carolyn B. Maloney, Vice Chair, a U.S. 
  Representative from New York...................................     3
Statement Hon. Robert P. Casey, Jr., a U.S. Senator from 
  Pennsylvania...................................................     4

                               Witnesses

Statement of Hon. Peter R. Orszag, Director, Congressional Budget 
  Office.........................................................     5
Statement of Dr. Lael Brainard, Vice President and Director, 
  Global Economy and Development, The Brookings Institution......    13
Statement of Maurice Emsellem, Public Policy Director, National 
  Employment Law Project.........................................    15
Statement of Lily L. Batchelder, Assistant Professor of Law and 
  Public Policy, New York University School of Law...............    18
Statement of Dr. Bradley R. Schiller, Professor, School of Public 
  Affairs, American University...................................    19

                       Submissions for the Record

Prepared statement of Senator Charles E. Schumer, Chairman.......    29
Prepared statement of Representative Carolyn B. Maloney, Vice 
  Chair..........................................................    30
Prepared statement of Hon. Peter R. Orszag, Director, 
  Congressional Budget Office....................................    31
    Letter to Director Orszag from Hon. Charles E. Schumer and 
      Hon. Jim Webb..............................................    40
    Response of Director Orszag to Hon. Charles E. Schumer and 
      Hon. Jim Webb..............................................    41
        Attachment, analysis, Congressional Budget Office, Health 
          and Human Resources Division...........................    43
Prepared statement of Dr. Lael Brainard, Vice President and 
  Director, Global Economy and Development, The Brookings 
  Institution....................................................    74
Prepared statement of Maurice Emsellem, Public Policy Director, 
  National Employment Law Project................................    77
Prepared statement of Lily L. Batchelder, Assistant Professor of 
  Law and Public Policy, NYU School of Law.......................    81
Prepared statement of Dr. Bradley R. Schiller, Professor, School 
  of Public Affairs, American University.........................    91


              MEETING THE CHALLENGE OF INCOME INSTABILITY

                              ----------                              


                      WEDNESDAY, FEBRUARY 28, 2007

             Congress of the United States,
                          Joint Economic Committee,
                                                     Washington, DC
    The Committee met at 9:35 a.m., in room 562 of the Senate 
Dirksen Building, the Honorable Charles E. Schumer, Chairman of 
the Committee, presiding.
    Senators present: Casey, Klobuchar, Schumer, and Webb.
    Representatives present: Maloney.
    Staff present: Katie Beirne, Chris Frenze, Nan Gibson, 
Rachel Greszler, Colleen Healy, Asrael Klein, Michael Laskawy, 
Frank Sammartino, Chad Stone, Annabelle Tamerjan, Robert 
Weingart, Adam Wilson, and Jeff Wrase.

OPENING STATEMENT OF HON. CHARLES E. SCHUMER, CHAIRMAN, A U.S. 
                     SENATOR FROM NEW YORK

    Chairman Schumer. Good morning. I would like to thank our 
witnesses and guests for attending today. Today we're at a 
critical juncture in America. In 2007, we are at a critical 
juncture in U.S. economic policy. We know that the upheavals 
caused by technological change and international competition 
most acutely affect those who are gaining least economically, 
the middle class and those who are aspiring to get there.
    Yet, in order for us to expand trade and make significant 
technological investments to help grow the economy, the middle 
class must feel that they will benefit. Right now, too many of 
them don't. They feel they're being left out of the party. 
Everyone knows that America is growing. Everyone knows the 
macrostatistics are pretty good. But your average middle-class 
person says I'm not doing so well. I'm not doing terribly, but 
I'm not doing so well. What's all this talk about prosperity?
    Working in a large corporation for 30 or 40 years that 
takes care of you and your family for a lifetime is rapidly 
becoming a thing of the past. Employers are now shifting the 
high costs of health care and the burden of saving for 
retirement on to families, and increasingly jobs are being 
automated away by technological advancements or moving 
overseas, leaving many displaced workers and their families 
behind at various levels of the economy.
    Meanwhile, official numbers on the economy have been 
positive, or at least until very recently. But we must face the 
reality lurking behind the official numbers in order to address 
anxiety on Main Street. Not only have wages significantly 
lagged behind productivity over the past two decades, but they 
are increasingly more volatile as workers bounce in and out of 
jobs. Even those in high-end jobs, computer programmers and 
others, cannot be assured the same job security they had 10 or 
15 years ago.
    So there's much more volatility in the job market. Between 
2003 and 2005, nearly 4 million workers were laid off from jobs 
they held for more than 3 years. About half of those workers 
and their families took a pay cut, and nearly one-third lost 20 
percent or more of their prior earnings.
    And if the recession in the manufacturing sector that hit 
our radar screens this week spreads throughout our economy, the 
economic roller-coaster for families will only get worse. 
Income volatility can cause major upheavals for families on top 
of the changes they're facing in the workplace. They can be 
forced to sell their homes, for instance, or discontinue their 
health care. Income volatility also leaves families feeling 
unsettled about their families and their children's economic 
future.
    We need a new policy direction to meet the challenge of 
income instability. That would be the topic sentence of this 
first hearing and something this Committee hopes to pursue. We 
must start by strengthening the safety net that helps displaced 
workers rebound from job losses that occurred through no fault 
of their own.
    We've asked our witnesses on the second panel to share 
their recommendations for doing just that. This morning our 
experts will explore new policies like wage insurance and 
income averaging, as well as ways to strengthen our existing 
unemployment insurance and trade adjustment assistance 
programs. We also need to do everything we can at the Federal 
level to spur the development of high quality, high paying jobs 
to replace the jobs lost in declining segments of the economy 
or through advancements in technology. We need to make serious 
investments in our most promising industries for future growth, 
such as renewable energy and life sciences, and there are many 
others.
    We need to help our displaced workers acquire the skills 
and experience they'll need to succeed in the new jobs created. 
We'll investigate opportunities for creating good jobs in more 
detail in a series of JEC hearings in the coming months. But 
right now middle-class families need help dealing with the 
tectonic shifts technology is causing. They need help dealing 
with the forces beyond their control that are changing their 
lives. They don't want handouts, but they certainly need a 
hand.
    I know we'll have some disagreements over particular 
solutions to this problem of income instability, but I hope 
that we will all prioritize the need to help our families 
mitigate the new risks they face and achieve their aspirations, 
and I look forward to working closely with all of you to do 
just that. As I've said before, the JEC will seek insight and 
advice from the best. That's what we have to offer here again 
today.
    With that, let me turn it over to the Vice Chair of the 
Joint Economic Committee, my friend and colleague from New 
York, who has done an excellent job on so many different 
issues, Chairwoman Maloney.
    [The prepared statement of Chairman Schumer appears in the 
Submissions for the Record on page 29.]

  OPENING STATEMENT OF HON. CAROLYN B. MALONEY, VICE CHAIR, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Representative Maloney. I thank the Chairman for yielding, 
and I thank him for his leadership on the issues before this 
Committee today. I've known him for 20 years, and he's always 
been a champion of the middle class and working for economic 
opportunities and for jobs for working men and women. I thank 
you, Chairman Schumer.
    I'm pleased to welcome Director Orszag on our panel of 
witnesses to talk about the critically important issue of 
income instability and what we can do to help families manage 
the economic shocks that we may experience. As Director Orszag 
points out, wild swings in the overall economy have been 
tempered, but the same cannot be said for the economic 
circumstances of families trying to adapt to a dynamic global 
economy.
    The Congressional Budget Office has looked at this issue 
and found that households experience significant ups and downs 
in their earnings and income from year to year, and the 
downside problem may be getting worse due to the forces of 
globalization and technological change. But not surprisingly, 
the income roller coaster is a particularly rough ride if you 
are less educated.
    Our second panel of witnesses will touch on various 
proposals to address income instability. I know that they, like 
the members of this Committee, will be coming at these issues 
from different perspectives, but I look forward to a very 
serious policy discussion and competition among ideas. One idea 
we will focus on today is wage insurance. Our Chairman is 
planning to introduce legislation on this issue which will no 
doubt generate further useful debate about what is the best way 
to deal with the adverse side effects of economic change. Dr. 
Brainard has offered a wage insurance proposal with her 
Brookings colleagues to provide economic incentive for more 
rapid re-employment and on-the-job training.
    I certainly agree with the goal, but not necessarily the 
game plan for getting there. As Dr. Brainard observes, our 
nation's safety net has--and I quote--``more holes than 
netting''--end quote. Which is why I think we should mend it 
before we make it bigger. Mr. Emsellem urges, wage insurance 
may well have a role to play, but implementing it should not 
come at the expense of shoring up the unemployment insurance 
system or trade adjustment assistance, both of which are in 
dire need of reform.
    Finally, CBO data show how the Tax Code can exacerbate 
income volatility, especially for low income taxpayers. 
Professor Batchelder proposes novel changes to the Tax Code so 
that low income families, whose incomes tend to fluctuate the 
most, could average their income over 2 years to smooth out 
variability and enjoy similar tax advantages as businesses in 
their ability to shift unused deductions and exemptions.
    As an aside, I want to note that CBO examined earnings and 
income volatility using the Survey of Income and Program 
Participation, the so-called SIPP, a leading source of 
comprehensive data on the income well-being of American 
families. Last year, there was an effort by the Administration 
to eliminate this very important program that gathers this 
important information between the haves and the have-nots 
without having an adequate plan in place to collect this 
invaluable information.
    The status of the SIPP remains up in the air. I hope, 
Director, you will join the growing chorus of researchers and 
academics who have called upon the Administration to preserve 
this survey until a better one can be designed and implemented.
    I look very much forward to the testimony of our witnesses 
and their thoughts on policies that can help America's working 
families better manage income instability, and I congratulate 
the Chairman for his leadership on this issue, and on his book.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 30.]
    Chairman Schumer. Thank you, Congresswoman Maloney.
    Senator Casey, would you like to make an opening statement?

  STATEMENT OF HON. ROBERT P. CASEY, JR., A U.S. SENATOR FROM 
                          PENNSYLVANIA

    Senator Casey. Just very briefly, Mr. Chairman. Thank you 
for putting this hearing together and bringing together the 
great witnesses.
    Director Orszag, we appreciate your appearance here, as 
well as the others.
    And I also want to commend Vice Chairman Maloney for her 
leadership of this Committee as well.
    I don't have a long statement other than to say what we're 
talking about here today I think is a reality for a lot of 
families across the country. Certainly in the state that I 
represent, Pennsylvania, we've got a lot of families that 
struggle with this issue. Very rarely, if ever, has it been 
dealt with here in Washington. I think often the message from 
Washington--certainly the message the last 5 years in my 
judgment--I hate to say this, but I think it's the truth--the 
last 5 years what families have heard, working families have 
heard from Washington is unfortunately you are on your own.
    We tell them they've got to achieve a high level of 
education; we don't help them enough to get there. We tell them 
they've got to train themselves and re-train and get new 
skills. The Federal Government doesn't do near enough. We tell 
them to go to college; we don't help them with that.
    This government has not helped them on the issue of health 
care.
    So over and over again we've told families, this government 
has told families you're on your own. This hearing today is one 
example of where the Federal Government can respond positively 
and constructively to the reality that families face in terms 
of their income instability. That's why I'm grateful for the 
appearance of our witnesses and the testimony and scholarship 
they'll bring to the recommendations that they make and the 
assessment of the problem.
    And I want to thank Chairman Schumer and Vice Chair Maloney 
for bringing this together. Thank you.
    Chairman Schumer. Thank you, Senator Casey. Thank you for 
the outstanding job you're already doing here.
    Let's go right now to our first witness on our first panel. 
We welcome CBO Director Peter Orszag. He needs no introduction 
to anyone whose followed economic policy in this country over 
the past decade. Peter is the new Director of the CBO. Before 
joining CBO, Dr. Orszag was the Deputy Director of Economic 
Studies at the Brookings Institution and Director of the 
Hamilton Project. He also served as Special Assistant to 
President Clinton for Economic Policies, Senior Advisor to the 
National Economic Council and Senior Economist on President 
Clinton's Council of Economic Advisors.
    We know you have a tight schedule and stretched it to be 
here. We very much appreciate your being here. We'll try to 
keep our questions to a minimum so you can get onto your next 
subject.
    Director Orszag.

  STATEMENT OF HON. PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Director Orszag. Thank you very much, Mr. Chairman, Vice 
Chair Maloney, other members of the Committee.
    My testimony this morning examines volatility at both the 
macroeconomic and the household income levels, along with the 
role of the Tax Code in smoothing income for both the 
macroeconomy and for households and workers. It makes three 
main points:
    First, macroeconomic volatility--that is, the ups and downs 
of the overall economy, overall economic growth and inflation--
has declined and is now relatively low. In particular, year-to-
year fluctuations in the economy have become smaller than in 
the past.
    You should have a handout with some charts. The first chart 
shows that economic growth volatility has declined, basically 
falling in half over the last 20 years relative to the 1950s, 
60s and 70s. Several potential explanations have been put 
forward for this so-called great stabilization. Among the 
leading explanations are that a more flexible economy, itself 
reflecting developments such as improvements in production 
processes and investments in information technology, have made 
it possible for the economy to adjust more smoothly to changes 
in the availability of goods and services. As a result, the 
macroeconomy can more easily adapt to shocks, such as the 
energy price shock of 2004 and 2005, without large changes in 
output or large jumps in inflation.
    Another explanation is that financial innovation since the 
1970s has provided alternatives to lending by banks, broadened 
opportunities for financial intermediation between borrowers 
and lenders and enhanced risk management. The result has been 
more stable financing for both businesses and households and 
more resiliency in the financial system, also leading to a 
greater middle-class stabilization.
    The second main point of my testimony is that, despite the 
relatively modest volatility that we now see in the overall 
economy, workers in households still experience quite 
substantial variability in their earnings and income from year 
to year. CBO has undertaken new empirical analysis to explore 
earnings and income volatility. Between 2001 and 2002, and, 
after adjusting for inflation, one in four workers saw his or 
her earnings increase by at least 25 percent while one in five, 
20 percent of workers, saw his or her earnings decline by at 
least 25 percent.
    The second table in my handout shows that workers with less 
education tend to experience more volatility in their earnings 
than do workers with more education. That is a pattern that has 
been shown in other studies as well.
    Such fluctuations in earnings can result from many sources, 
including job changes, voluntary exits from the labor force for 
reasons such as to care for children or other family members, 
changes to the number of hours worked per year or changes in 
the wage rate received by workers--and more work is needed in 
order to parse out the causes of this volatility.
    The third point of my testimony is that the figures I just 
referred to are for before-tax earnings and income. The Tax 
Code can play a very important role in smoothing income 
variability, both at the macroeconomic level and at the 
microeconomic level. At the macroeconomic level, economists 
have long referred to the tax system as an automatic 
stabilizer. That is, the Tax Code offsets part of shifts in 
demand in the economy and thereby helps to smooth overall 
economic performance.
    At the household level, the final chart that I've given you 
provides an example of how the Tax Code helps to smooth income. 
Consider a single worker earning $45,000. The worker owes 
roughly $5,700 in Federal income taxes and about $3,400 in 
payroll taxes, leaving about $36,000 in after-tax income. If 
that worker's wages were to fall by $9,000, after-tax earnings 
would fall by $6,672, a lot less than the $9,000. That 
illustrates the role of the Tax Code in offsetting part of the 
income volatility that exists on a pre-tax basis.
    This insurance provided by the tax system, though, can come 
at a price for households with variable income, in particular 
households whose income varies year by year will wind up paying 
more in taxes over their lifetime than other households who 
have the same lifetime earnings but steady income from year to 
year. Various options for changing the tax system would alter 
the tradeoff between the income insurance provided by the Tax 
Code and the price that's paid by households with variable 
income for obtaining that insurance.
    In addition to this tradeoff between the insurance provided 
and the price paid by households with variable income, any risk 
sharing benefits that the tax system generates must be weighed 
against potential costs that it can impose on the economy at 
large.
    Comparing the costs and benefits is difficult, and a 
complete accounting has not yet been achieved. Nonetheless, 
some recent studies have attempted to assess the importance of 
the insurance benefit of the tax system in smoothing income 
volatility. Those studies have found that, when compared with 
other alternatives, the insurance benefits of the current tax 
system may be larger than the costs it imposes on the economy, 
for example, by distorting decisions to work and save.
    A reasonable conclusion from this new research is that the 
income smoothing insurance provided through the tax system 
could be quantitatively important and should be taken into 
account in any analysis of the relative costs and benefits of 
different tax systems.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Director Orszag (including the 
charts and tables referenced above) appears in the Submissions 
for the Record on page 31.]
    Chairman Schumer. Thank you, Director Orszag. As usual, 
your testimony is to the point, succinct, and focused on the 
questions we are facing. Thank you.
    One of the points you make in your testimony is that part 
of the reason we have greater stability in the economy as a 
whole is there's greater economic flexibility. One of the 
consequences of that flexibility is that for many workers 
employment becomes less stable, both in the amount of money 
earned and in actually having a job. In other words, we have a 
conundrum: we have greater stability in the broader economy but 
greater instability for workers and their families. It's almost 
as if the middle class and working class workers are the shock 
absorbers to keep the economy stable. They sort of suffer, as 
opposed to in the old days where they sort of stayed pretty 
even and the economy went up and down more.
    Given all of that, I'd be remiss if I didn't ask you to 
comment on the most recent economic news. In the past week, 
we've seen the following: Alan Greenspan predicted the economy 
could slip into recession by the end of the year, we had a 
massive sell-off on Wall Street yesterday, highlighting our 
vulnerability to market events in China, we have caught wind of 
a recession in the manufacturing sector, which declined more 
than anyone expected, and the recently revised GDP number that 
came out just today shows our economy is not growing as fast as 
we thought.
    My question is two-fold: one, are you suggesting that our 
ability to withstand bad economic developments requires that 
workers and their families pay the price of greater instability 
and, two, isn't the implication of what you're saying to us 
that in this new economy we're going to have to develop new 
policies to help families deal with increased economic 
instability.
    Director Orszag. Senator, with regard to your first 
question, I wouldn't say that stability at the macroeconomic 
level requires instability for families. But what I would say 
to that is it is certainly plausible that many of the forces 
that have created stability at the macroeconomic level are also 
partially responsible for the instability at the microeconomic 
level. The challenge becomes how can you preserve the benefits 
of macroeconomic performance, including overall economic growth 
and overall stability, while perhaps reducing volatility at the 
household level. On that front, I would say there are two broad 
approaches: one is to try to intervene in some way before 
market outcomes are determined that directly affect someone's 
wage or directly affect a particular sector or a particular 
firm. Another approach is to intervene after market outcomes 
are determined with things like the earned income tax credit or 
with wage insurance or other approaches like that.
    My read of the evidence suggests that the more you try to 
do on the direct market interventions, the more costly that 
macroeconomic implications are. The evidence broadly suggests 
that intervening through social insurance and the Tax Code is a 
better tradeoff in terms of delivering better outcomes at the 
household level without harming macroeconomic performance.
    Chairman Schumer. In other words, acknowledge economic 
forces, but then deal with them and their consequences to other 
people, rather than change the economic forces.
    Director Orszag. That's correct. Your second question--what 
was your second question, again?
    Chairman Schumer. It was the opposite side of the same 
coin, which you sort of answered.
    One other question: It's clear that one of the major 
differences between the economy today and the economy of 50 
years ago, is that there is a big increase on the return of 
intellectual capital.
    I always use the example of Henry Ford and Bill Gates. Each 
one created enormous wealth, each dramatically changed the 
economy. Each one should have become rich, but one of them 
needed many more workers, if you will, to share his idea, than 
today, because the ideas are more intangible, because we have 
different ways, quicker ways of communicating, selling, et 
cetera.
    Henry Ford created a million jobs, each making $10,000 a 
year. Bill Gates created 10,000, each making a million dollars 
a year. That's a rough cut, but it has some truth to it.
    Given all that, given that wealth agglomerates, it seems to 
be agglomerating to the top. I should say this: It's not the 
fault of George Bush or anybody else. He's doing nothing to 
help it, but it's not his fault.
    It's a fundamental condition of the economy. Doesn't it 
make sense that we ought to look at further progressivity in 
the Tax Code?
    Director Orszag. Let me say a couple of things about the 
Tax Code, again reinforcing the point that my testimony makes, 
the Tax Code can play an important role in smoothing economic 
volatility at the household and worker level.
    It is generally true that a more progressive Tax Code 
provides more insurance at the household level; in other words, 
helps to smooth income more than a less progressive Tax Code.
    Obviously, a choice as to the appropriate level of 
progressivity, is up to policymakers like you, but the point of 
my testimony is that you should take into account, another 
important factor.
    Traditionally, people look at fairness or equity versus 
incentive, in measuring progressivity of the Tax Code. I think 
that in an environment in which household income volatility is 
much higher, you also need to take into account, this role of 
the Tax Code in helping households and improving economic 
efficiency.
    Furthermore, you also need to consider what the 
alternatives would be, if household anxiety rises to such a 
level that there are demands for other steps.
    Returning to our previous discussion about pre-tax versus 
post-tax, that it generates demands for other steps that would 
be more costly, that's another factor that should be taken into 
account in evaluating the appropriate level of progressivity.
    Chairman Schumer. Thank you, Director, Orszag. Senator 
Casey?
    Senator Casey. Thank you, Mr. Chairman. Mr. Director, I was 
struck by some of the information in your testimony, as well as 
the prepared testimony, with regard to risk-sharing.
    I wanted to have you speak to that. I know that in one part 
of your written testimony, on page 11, you say that the 
predictability of household income will affect how much value 
they place on the insurance provided through the tax system.
    I just wanted you to speak to that in terms of how this 
issue not only has a direct impact on families' income and 
their ability and their instability, I should say, with regard 
to income, but, specifically, how that affects the economy 
overall, their ability, for example, to take risks to make an 
investment, to invest in more training or invest in a family 
need.
    If you could just speak to that question of risk?
    Director Orszag. Let me make a few comments. With regard to 
the specific comment in the testimony, it obviously matters, if 
your income is going to fall by a certain percentage; it 
matters whether you can anticipate that and know that ahead of 
time.
    For example, in taking this job, my income has declined. I 
knew that that was going to happen. That's a different thing 
than having that happen in an unexpected way.
    In terms of an insurance system, what you want is to 
provide protection to people experiencing unexpected events. 
That was the point of that sentence.
    I would also say, Senator, that as we look at increased 
risk, higher levels of volatility in the economy, again, 
exploring the role of the tax system in offsetting that 
volatility, is critically important, and that's a basic point 
of my testimony.
    Finally, I would just say one further thing: The role of 
insurance in encouraging certain activities, the fact that 
you're protected against downside risk. We know that in the 
corporate sector, limited liability likely played an important 
role in encouraging the vast expansion of corporate activity.
    The same logic may well apply at the household level. If 
you know that you are protected against certain really bad 
outcomes, you may be more willing to take risks in the first 
place.
    I think that insight can apply across a wide variety of 
settings. For example, it is well known that the return to 
college, the economic benefits of going to college, have gone 
up, on average.
    It is also the case, and much less remarked upon, that the 
return to education, the return to going to college, has become 
much more risky; in other words, it's become much more 
variable.
    Some people wind up doing really well, and some people earn 
a lower return from having gone to college.
    Whether that affects the incentives to enroll and take the 
risk of going to college, in a sense, is, I think, an important 
topic. I think you're hitting on a potentially quite important 
issue, which is whether this increased volatility and increased 
risk at the household level, is impairing some steps that would 
actually improve long-term economic performance, because people 
don't take the kinds of risks that they otherwise would.
    Robert Schiller is a professor at Yale and has written 
basically a whole book on exactly that point, that because 
there are not enough different kinds of risk protection in the 
economy, people don't take the risks that will lead to better 
economic performance.
    Senator Casey. I have one more question. With regard to the 
chart--I'm not sure everyone can see this, but the chart that 
you gave us with regard to volatility as it pertains to GDP 
growth, for those who can't see it, the overall umbrella, is 
the question of volatility.
    There are two time periods: 1950 to 1984 and then 1985 to 
2005. But I was really struck by both the GDP growth line and 
the inflation line.
    Could you just talk about the 1950 to 1984's 3.1 versus the 
1985 to 2005, 1.4? They're striking numbers.
    I'm not sure that when you were giving the overview of your 
testimony, we didn't stop and highlight them. I just want to 
have you comment on the significance of just that GDP growth, 
that particular line of the chart.
    Director Orszag. What that tells you, is, in terms of year-
to-year ups and downs in the overall economy, they are much 
less severe now than they were in the past. That is reflected 
in a variety of things.
    Recessions tend to be less severe than they were in the 
past; booms tend to be--you know, there tends to be less 
movement from one year to the next in overall economic 
performance. This is referred to as the great stabilization.
    There's an ongoing question as to exactly why it has 
occurred, but the evidence does suggest that at least over the 
past 20 years or so, economic performance is more stable than 
it was historically.
    Senator Casey. Thank you very much.
    Chairman Schumer. Senator Klobuchar?
    Senator Klobuchar. In your testimony, you talked about how 
the household income has become more volatile, but that this 
volatility may be the price we're paying for relative macro 
economic stability.
    At the same time, you talk about how it's easier now for 
families to get credit. The question I had, just from cases 
that I've seen when I was a prosecutor and things that I've 
seen in our own community is--is it beneficial to the economy 
as a whole or to families to offer credit to low- and middle-
income families, thus increasing their debt levels when they 
have little chance of repaying the debt?
    Director Orszag. The spread of financial products allows 
households to adjust in ways they weren't able to before, but 
whether that opportunity is used well and used prudently and 
used in a sound way, is a harder question. I think we would 
all, if our income falls by 40 percent, welcome the opportunity 
to be able to cushion the blow, at least temporarily, by having 
access to borrowing.
    Whether, however, borrowing is done over a longer period of 
time, in an unsustainable way, is a harder question.
    The concerns Senator Schumer raised about developments 
recently, which may be tied to the mortgage market, is a 
reflection of ongoing concerns about the degree to which those 
financial possibilities are being exercised in a sound, 
prudent, and responsible way.
    Senator Klobuchar. How about the debt? What does this mean 
for the long-term stability of our families?
    Director Orszag. A few comments: The financial obligation 
ratio, that is, basically the payments that households have to 
make on debt relative to income, as calculated by the Federal 
Reserve, is significantly higher than it was in the past. On 
the other hand, net worth is also higher, relative to income, 
than it was in the past.
    I think that the key question on debt, is whether there is 
a significant mismatch between debt and assets and income that 
can finance that debt. Obviously, there are concerns about that 
mismatch.
    What I say, more broadly, though, not just at the household 
level, or net national savings rate is now bouncing around 
somewhere around zero and 2 percent or zero to 2.5 percent. 
That level of net national savings, necessarily implies one of 
two things: Either we're only going to be investing that amount 
domestically, or we're going to be borrowing the difference 
from abroad.
    Increasingly, what we are doing, is the latter, borrowing 
the difference from abroad. That is not, however, free money. 
We are running a very large current account deficit and 
accumulating significant liabilities to foreigners.
    That effectively imposes a burden on future American 
generations, because they will not enjoy the full returns of 
investments that are being made today.
    Senator Klobuchar. I think, if I remember the statistics, 1 
out of 12 Federal tax dollars is going to interest on the debt 
and a lot of it is going to foreign entities, foreign 
countries.
    Again, it concerns me for the long-term stability of the 
country and for our families.
    Last, in your written testimony you mentioned that research 
on the rise of wage volatility and income instability is 
currently lacking and that this lack of research makes it hard 
to reach firm conclusions about the significance of these 
trends.
    Is this something that this Committee could help to push 
along?
    Director Orszag. Yes. Let me sort of reinforce that. I 
think that a variety of evidence suggest that volatility at the 
household level is now higher than it was in the 1970s. Exactly 
what the time pattern was, whether it went like this or went 
like that, I don't think we know enough to conclude.
    The Congressional Budget Office will be looking into this 
issue, and I would welcome your continued interest in that 
topic. We have the ability to use other datasets and do other 
work than some private academic researchers do. I'm very much 
eager for us to do that.
    Senator Klobuchar. Thank you.
    Chairman Schumer. Senator Webb?
    Senator Webb. Thank you, Mr. Chairman. I'm trying to find a 
mike here. You've got me sitting in a place where I can't be 
heard.
    Chairman Schumer. Not by design, I assure you.
    Senator Webb. I'm not so sure.
    [Laughter.]
    Senator Webb. I'm sorry to have arrived at the end of your 
testimony or after your testimony was given, Director Orszag.
    I have one question about your chart, and then just a 
general question. This distribution of changes in workers' 
annual earnings that you use in your chart--and, by the way, as 
a writer, I know a great deal about income instability. Some 
years are good and some years aren't.
    But you use changes in earnings from 2001 to 2002. I'm 
wondering if those years are representative of what's going on 
now and what was going on before then.
    This was the year of 9/11, and there was an enormous jolt 
in many sectors of the economy, and the absorption of that jolt 
was felt in different places in the economy. So I'm wondering 
why you used those 2 years and whether they are representative.
    Director Orszag. We also did the analysis for 2 years in 
the mid- to late 1990s and found similar results, so we're more 
confident that these numbers are representative of some recent 
level of volatility.
    Obviously, as we try to expand our work in this area, we'll 
be able to add more years and more information, including from 
other datasets, but I think, again, a variety of evidence from 
different data sources and from different years, suggests that 
at the household and worker level, there is a significant 
amount of volatility.
    Senator Webb. Do you have numbers at hand from years after 
2002?
    Director Orszag. No, I don't have that.
    Senator Webb. It will be interesting to see those, because, 
as you know, there were some huge job shifts that took place 
into the government sector, regionally, and otherwise. It would 
be interesting to see how those impacted with respect to not 
only wage levels, but education levels, different kinds of 
jobs, not only the jobs that came out of the homeland security 
environment and the spinoffs, but jobs that were lost because 
of the internationalization of corporate America.
    We're seeing in this country, perhaps a steady line in 
terms of numbers of jobs, but, really, it's a different 
situation in terms of the quality of a lot of those jobs.
    There's no data that you have, that would be able to 
reflect what's been going on in the last 3 or 4 years?
    Director Orszag. We will be able to provide you updated 
information, and, as was earlier mentioned, these data are 
based off of a particular dataset and there are some lags 
involved, so that we don't have instantaneous access to the 
most recent information.
    Nonetheless, we can provide something that's more recent 
than this, and part of our expanded activity will be do exactly 
that prior to giving you those results.
    Senator Webb. Someone may have asked this question before I 
got here, but I have heard it said that a lot of the proponents 
of wage insurance, argue, either directly or implicitly, that 
it would encourage workers to take lower-paying jobs.
    Would you say that's correct?
    Director Orszag. Theoretically, it could have that effect. 
The evidence that we have from an experiment in Canada, 
however, suggest that, in practice, it either has limited or 
very minimal significance.
    The basic theory that if you're cushioning the blow, people 
may be more willing to take a lower-paying job, seems correct, 
but in practice, it doesn't seem to be that consequential.
    Senator Webb. Thank you.
    Chairman Schumer. Thank you, Director Orszag. I would ask--
I don't know if we need to send a letter to CBO, but following 
up on Senator Webb's question--I have the same one--is it 
possible now for you to do an analysis of some of the later 
years, in terms of volatility?
    [A letter to Director Orszag from Chairman Schumer and 
Senator Webb appears in the Submissions for the Record on page 
40.]
    Director Orszag. I think so.
    Chairman Schumer. The Committee is going to request that 
you do so, and you can get us an answer, either with numbers or 
saying you can't do it, until you have the following data. 
Thank you.
    [A response from Director Orszag to Chairman Schumer and 
Senator Webb appears in the Submissions for the Record on page 
41.]
    Director Orszag. Thank you very much.
    Chairman Schumer. Thank you, Director Orszag. You've done a 
great job, as usual. Let me call our next panel forward.
    Thank you all for coming. In our second panel, we're going 
to be hearing from Lael Brainard, vice president and founding 
director of the Global Economy and Development Center at the 
Brookings Institution. Dr. Brainard served as deputy national 
economic advisor and chair of the deputy secretary's Committee 
on International Economics during the Clinton administration.
    As deputy director of the National Economic Council, she 
helped build the new White House organization to address global 
economic challenges such as the Asian financial crisis, and 
China's WTO entry.
    Maurice Emsellem is the public policy director of the 
National Employment Law Center. Mr. Emsellem's areas of 
specialization are: government systems of support, including 
unemployment compensation, workforce development programs, and 
the welfare system. He's published extensively on the 
unemployment system.
    Professor Lily Batchelder is assistant professor of law and 
public policy at NYU School of Law. Her current areas of 
research include: tax incentives, wealth transfer taxation, 
income volatility and social insurance. She previously 
practiced law at Skadden Arps, as well as a Wiener Fellow at 
the Wiener Center of Social Policy at the Kennedy School.
    Dr. Bradley Schiller is a professor at the School of Public 
Affairs at American University here in Washington. He not only 
teaches economic theory to students and practitioners in public 
policy, but practices it as well. His specializations include 
public policy analysis in economic policy as a consultant to 
governments and major corporations. He's designed, evaluated, 
and even operated scores of employment training and welfare 
programs.
    Dr. Schiller also lectures extensively on Social Security 
reform and the Federal budget.
    I want to thank all the witnesses for being here. We should 
have a lively discussion. You each have 5 minutes, but your 
entire statements will be included in the record. Dr. Brainard, 
you may begin.

 STATEMENT OF DR. LAEL BRAINARD, VICE PRESIDENT AND DIRECTOR, 
  GLOBAL ECONOMY AND DEVELOPMENT, THE BROOKINGS INSTITUTION, 
                         WASHINGTON, DC

    Dr. Brainard. Chairman Schumer, Senators Klobuchar, Casey, 
and Webb. It's a pleasure to be here. It's a pleasure to be 
focusing on an issue which I think is a reality that confronts 
more and more middle-class Americans and hasn't received much 
attention in the last few years.
    I'll only spend a minute and a half on the backdrop, some 
of the forces, maybe, that are leading to increased insecurity 
for many Americans today, and then talk about one possible 
proposal to add to the arsenal to help Americans cope with 
uncertainty.
    In terms of the backdrop, one of the inevitable forces 
affecting the economy today, is that we are, I think, 
experiencing a new wave of globalization. We've experienced 
waves of globalization before.
    This one, I think, has familiar elements, but the scale, 
the scope, and the speed, are something we have not experienced 
before, partly because China is pursuing, at a scale that has 
never been done before, a growth strategy that's very export-
led, and foreign direct-investment-fed, which means that it has 
repercussions for every economy in the global marketplace--and 
especially in manufacturing.
    China's entry is confronting higher-wage competitors with a 
stark choice: You either move up the value chain or cut costs. 
That challenge, I think, is made much more complex by the 
concurrent emergence of India.
    India is a very different story, very much more 
consumption-focused, but confronting white collar workers with 
foreign low-wage competition for the first time, a very 
different playing field than they're accustomed to.
    And then if you look at the scale of those two economies 
together, essentially in a very short period of time, we're 
being asked to absorb a 70 percent expansion of the global 
labor force. Any textbook model would tell you that that kind 
of expansion, while capital- and investment- and technology-
adjusted, is going to put a little bit of pressure, at minimum, 
on wage earners at the middle.
    In fact, that's what we're starting to see; we're starting 
to see the evidence that inequality is increasing and that the 
earnings at the middle, the gap between the middle and the top, 
is increasing.
    What's the answer to some of this? Well, a piece of the 
answer has to be to strengthen social insurance. Despite the 
fact that, as Director Orszag was testifying earlier, in the 
U.S. context, there's a lot of flexibility, there is a lot of 
churn at the worker level, and our social safety nets are the 
weakest among the rich economies.
    If you look at what happens to permanently displaced 
workers, they can experience average earnings decline of 16 
percent when they are reemployed. For manufacturing workers, 
that average earnings drop can be 20 percent--very substantial.
    In import-competing industries, the numbers are even more 
stark. What are the social programs that we have to address 
that difficulty?
    The reality is, they're pretty thin and they're pretty old, 
so, unemployment insurance, as everybody knows, has a lot of 
holes in it, to the extent that only about 40 percent of 
workers are actually in that system.
    The other system that we have developed was back in the 
1960s. President Kennedy developed trade adjustment assistance. 
It had laudable goals, but the reality is that, unfortunately, 
for complicated reasons, most workers don't actually qualify 
for benefits, and those that do experience long periods out of 
work and the same kind of income declines when they come back 
into work.
    What else could we possibly add to the arsenal? I think one 
thing we should be taking a serious look at is wage insurance, 
and let me just state right up front that the intent here is 
not to replace other programs, but to augment the existing 
safety net.
    Vice Chair Maloney was talking earlier about mending the 
existing programs. I think we need to mend and expand. I don't 
think it's an either/or; I don't think it should be.
    The point of wage insurance is to essentially help workers 
by insuring them against that kind of steep decline in earnings 
following permanent displacement, and the kind of displacement 
that we would be talking about would be factors outside of a 
worker's control.
    The idea would be to essentially subsidize their initial 
salary on the new job for some period of time, while their 
attachment to the new job improved, while they might acquire 
on-the-job skills to make them more productive, more valuable 
to their new employer.
    There are different ways that you can structure such a 
program. We have a policy brief that I've put on the back table 
that gives you a variety of different parameters, but, 
obviously, the key parameters are how much of the earnings loss 
you are going to replace, what kind of a cap you put on that 
compensation each year--and that, of course, affects who is 
more likely to qualify for these benefits--and, of course, what 
the duration of that is.
    Let me just give you an example of a program that would 
replace about 50 percent of an earnings loss, up to a maximum 
of about $10,000 a year. That kind of a program, we estimate, 
would cost on the order of about $3.5 to $4 billion per year.
    And if you think about an average trade-displaced worker 
who earned $37,000--more than that in 2004--their experience, 
generally, in 2004, was a 26 percent drop in earnings, so if 
you insured half of that, you'd essentially be receiving 
$33,500, rather than $37,000. That's $6,000 a year, a big 
change in terms of smoothing that income on a per worker basis.
    It's an insurance program that would essentially amount to 
about $25 per worker per year.
    There are a variety of ways you could implement it through 
the existing unemployment insurance program, or through the 
refundable tax credit. There are a variety of ways you could do 
it.
    So the bottom line, I think, here, is wage insurance is a 
potentially important tool to be added to the arsenal of 
available tools. I don't see, again, any reason that there has 
to be a tradeoff between existing, improving existing and 
expanding.
    [The prepared statement of Dr. Brainard appears in the 
Submissions for the Record on page 74.]
    Chairman Schumer. Thank you, Dr. Brainard. We'll now turn 
to Mr. Emsellem, who has a different point of view. I'd ask 
each witness to try to stay within the 5 minutes, so get to the 
heart of your arguments.

STATEMENT OF MAURICE EMSELLEM, PUBLIC POLICY DIRECTOR, NATIONAL 
              EMPLOYMENT LAW PROJECT, OAKLAND, CA

    Mr. Emsellem. Thank you, Senator, members of the Committee. 
Our organization, the National Employment Law Project, 
specializes in economic security programs. We have a long 
history of serving families hard-hit by economic downturns, by 
helping them access the benefits and by promoting innovative 
policies that deliver on the promise of economic opportunity.
    We'd like to offer our perspectives on proposals to create 
a new program of wage insurance for dislocated workers, then 
highlight other options for Federal reform to protect 
communities struggling to cope with the realities of today's 
unstable economy.
    Like the AFL-CIO and several major unions that have 
expressed serious concerns with wage insurance, we believe 
there are far too many unanswered questions that convince us 
it's not the right time to move ahead with a national wage 
insurance program.
    First, it's important to ask the question that Senator Webb 
posed, whether wage insurance will promote more downward 
mobility for the nation's most vulnerable workers, since, by 
definition, wage insurance is only available for jobs that pay 
less than they earned before and are less likely to provide 
health insurance and other critical benefits.
    We believe the limited Federal resources devoted to the 
economic security of America's workers, should promote good 
employment outcomes and quality jobs, but that's not the case 
with wage insurance.
    We're also not aware of any empirical evidence that wage 
insurance jobs will promote transferable skills or meaningful 
training. Workers are usually employed full-time to qualify for 
wage insurance. The program may actually preclude workers from 
pursuing education and training they need to compete for better 
jobs in today's economy.
    Second, does the experience with actual wage insurance 
programs make a convincing case that now is the time to create 
a new national program?
    What we know from the only major evaluation of a wage 
insurance program, the Canadian pilot program, is that it 
failed in most areas to achieve its intended results, thus, the 
Canadians never adopted wage insurance.
    I could say more in response to Senator Webb's question 
about the issue of downward mobility and what they found there. 
They found that at the low end of the wage scale, in fact, 
folks who accepted wage insurance, did take lesser-paying jobs.
    It evened out, when you looked at the various wage scales, 
but that's all we know, that limited information about the 
impact on wages, of wage insurance. There's no information on 
the impact of benefit and other critical criteria.
    We're still waiting for the results from the U.S. pilot 
program serving trade-impacted workers over age 50, although we 
know that participation has been limited.
    Another question that has not received enough attention, 
is, what impact will the program have on other workers who are 
competing for similar jobs, with those collecting wage 
insurance?
    A leading researcher with the Upjohn Institute found that, 
quote, ``Virtually all the employment gains experienced by 
dislocated workers, as a result of the wage subsidy, came at 
the expense of other workers.'' Will this crowding-out effect 
be even more severe in those communities in the Midwest and 
elsewhere, where there are already large concentrations of 
dislocated workers?
    In addition to the research questions, there's also a 
concern that wage insurance could undermine those Federal 
programs that now provide some measure of economic security to 
U.S. workers. For example, will major funding and support for 
wage insurance, take precedence, in reality, here in Congress, 
over long-delayed reforms of the TAA and UI programs?
    Certainly, if wage insurance is funded by the Federal UI 
payroll tax or other similar sources of revenue, it will 
effectively compete for funding at a time when unemployment 
insurance desperately needs to be modernized.
    We're also concerned with the precedents wage insurance 
will set when hostile groups like the Heritage Foundation, are 
on record strong supporting wage insurance as a rapid 
reemployment substitute to dismantle the TAA program. Will wage 
insurance set the stage for more attacks on TAA, which is up 
for authorization this year and the UI program?
    These are some of the questions that leave many of us who 
work with these programs convinced that a national program of 
wage insurance could do more harm than good.
    So, what are some other priorities for Federal reform to 
create a reemployment system that promotes quality jobs? First, 
we urge Congress to fulfill the promise of economic security to 
the nation's workers, who have suffered major job losses due to 
Federal trade policy.
    That means reforming the TAA program, starting by removing 
the $220 million cap on training funds that has left many 
states forced to suspend or deny enrollment to thousands of 
eligible workers. In fact, we have an office in Michigan and 
there we know that just a few months into the funding cycle now 
for TAA, they have already obligated the State of Michigan all 
its current TAA training funds due to the massive layoffs in 
the auto industry. That should be a priority.
    Second, it's time to finally modernize and expand 
unemployment insurance by making Federal incentives available 
to states that fill the gaps in the program, which now deny 
benefits to most low-wage and women workers and to support 
education and training with the help of extended unemployment 
benefits.
    We're not talking about training, just for the sake of 
training, but training of the sort that many states are 
pursuing, like industry-sector initiatives that have proven 
successful in improving employment outcomes and making their 
industries more competitive.
    Finally, Congress should support or replicate some of the 
most promising innovative state strategies, like self-
sustaining home protection funds that prevent foreclosures, 
healthcare coverage for those who qualify for UI benefits, and 
model training partnerships with business and labor to help 
save good jobs. Thank you for your interest and commitment on 
these issues.
    [The prepared statement of Mr. Emsellem appears in the 
Submissions for the Record on page 77.]
    Chairman Schumer. Thank you, Mr. Emsellem, thank you for 
being right on point in answering the questions directly. 
Professor Batchelder?

STATEMENT OF LILY L. BATCHELDER, ASSISTANT PROFESSOR OF LAW AND 
        PUBLIC POLICY, NEW YORK UNIVERSITY SCHOOL OF LAW

    Ms. Batchelder. Thank you very much for the opportunity to 
testify today. What I would like to do, is briefly discuss who 
is burdened by income volatility and how income tax 
simultaneously helps and hurts these families, then outline two 
proposals that could be implemented on a revenue-neutral basis, 
each of which could increase the way that the tax system helps 
families cope with income fluctuation, and decrease the ways in 
which it penalizes them.
    As the other panelists have discussed, household income 
volatility is extensive, and the evidence to date suggests that 
it has been rising. This is a serious problem and can increase 
families' stress; it can force families to incur additional 
living expenses, for instance, if they move more often, and 
these hardships are greatest for middle- and low-income 
households, because they typically have less savings which can 
serve as a buffer, and, relatedly, they typically have less 
access to low-cost borrowing.
    Unfortunately, as you can see in the first figure in my 
written testimony, these are also the families that face the 
widest swings in their income. Income volatility is essentially 
disproportionately affecting the families that are least able 
to cope with it.
    Currently, the income tax simultaneously helps and hurts 
these families. It helps because a progressive income tax 
results in families paying more tax in relatively good years, 
and less tax in relative bad ones, so it essentially softens 
income fluctuations on an after-tax basis.
    It hurts, because, over time, it imposes higher tax burdens 
on a household that has relatively volatile income than it does 
compared to another household that has the same average income, 
but a household that earns it more smoothly.
    I refer to these higher tax penalties as ``fluctuation 
penalties.'' They basically result from families with unstable 
income, being bumped into higher tax brackets that would never 
have applied, if their earnings were more stable.
    Like income volatility, these penalties are largest for 
middle- and low-income families. They can actually be immense 
for low-income households who have the most volatile incomes.
    I think we can do better than this in the tax system. We 
should be trying to make the income tax impose more equal tax 
burdens on households with volatile incomes, and we should 
deliver that tax relief in years when their income has actually 
declined.
    So, as Director Orszag mentioned, one way you could view 
what the tax system is currently doing, is these fluctuation 
penalties are essentially like premium payments for the income 
insurance that it's providing by smoothing income on an after-
tax basis.
    Our goal should be to increase these income-smoothing 
benefits, while decreasing the premium payments. One promising 
way that we could do this, is a limited form of income-
averaging, which I refer to as targeted averaging, which would 
allow families to carry back the standard deduction and 
personal and dependent exemptions for 1 year, and also to 
average their income over 2 years for purposes of calculating 
their earned income tax credit.
    What this would mean, is, if a family's breadwinner lost 
his or her job or was a writer and had a bad year, and their 
income fell to a point that they couldn't use all of their 
personal deductions, they could apply them to the previous year 
and receive a refund in the current year for that amount. They 
also might be eligible for a larger EITC.
    This is a relatively modest and administrable proposal, but 
the simulations I've done, suggest that it actually would 
eliminate a substantial share of the fluctuation penalties that 
the income tax creates, and it would make the tax system better 
at smoothing after-tax income, because families would generally 
only benefit from this in years when their income has declined.
    The second complementary, but much broader approach that I 
would like to mention, is the possibility of transforming 
individual tax incentives into uniform refundable tax credits.
    Currently, we provide about $500 billion a year in tax 
incentives intended to encourage households to spend or invest 
their money in ways that we consider socially valuable.
    I want to pause and emphasize, as you grapple with on a 
much more daily basis than me, that $500 billion is a really 
big number. It's close to 4 percent of GDP, about equal to our 
outlays for the Department of Defense last year. It's about 
half of individual income tax revenue raised last year, and the 
vast majority of these tax incentives are structured as 
deductions or in other ways where their value rises, the higher 
income you are. It depends on your marginal tax rate.
    What these types of tax incentives do, is actually create 
fluctuation penalties, beyond those that exist in the regular 
income tax. What's worse, is, they mean that people get the 
biggest incentive in their relatively good years and the 
smallest incentive in their relatively lean years.
    So, unlike the rest of the income tax, these types of tax 
incentives aren't sort of simultaneously helping and hurting 
families with unstable incomes; they're only hurting them.
    If they were structured as uniform refundable tax credits, 
which could be done on a revenue-neutral basis, they wouldn't 
generate these fluctuation penalties, because they would be 
worth the same amount every year, and they wouldn't provide 
smaller benefits in years when a family's income decline.
    I also think they would be more fair and efficient for 
other reasons I can go into. In short, I think both of these 
proposals are worth serious consideration as ways that the tax 
system deals with families with unstable income and I look 
forward to your questions.
    [The prepared statement of Ms. Batchelder appears in the 
Submissions for the Record on page 81.]

  STATEMENT OF DR. BRADLEY R. SCHILLER, PROFESSOR, SCHOOL OF 
              PUBLIC AFFAIRS, AMERICAN UNIVERSITY

    Dr. Schiller. Thank you for this opportunity to testify on 
this important subject. In addition to being a professor at 
American University, I'm sure Chairman Schumer will take note 
that I'm the author of three very expensive college textbooks 
and so will be regarded as a hostile witness here.
    Chairman Schumer. Perhaps we can make them deductible.
    Dr. Schiller. That would be nice. Maybe the hostility level 
will rise when I offer my message, which is to praise income 
volatility, not to bury it. The United States would be a far 
less vibrant economy if we go too far in trying to make incomes 
stable. We would look more like the French than the 
entrepreneurs of Silicon Valley.
    Let me remind you of the French riots of last spring. 
French workers have always had tremendous wage insurance; in 
fact, they've had pretty much lifetime income security through 
a package of income growth, guaranteed fringe benefits and 
generous pensions. What sparked the riots in Paris last year 
was a proposed increase in resource mobility, specifically a 
very modest proposal that would allow employers to fire newly 
hired workers within 1 year for any reason for workers under 
age 26. Well, the French youth viewed that as a threat to their 
own income security and took to the streets.
    The important point I want to make is many of those French 
youth have stayed in the streets because the French system of 
wage insurance and guaranteed lifetime incomes puts an enormous 
cost on employers, and employers are very reluctant to hire, 
therefore, new entrants. Youth unemployment in France hovers 
around 24 percent, more than double the U.S. levels. The French 
economy is growing half as fast as the United States and the 
French middle class has incomes 25 percent below American 
levels. So I ask you at the beginning how many Americans do you 
think would trade American prosperity for French income 
stability? The reality is the resource mobility, specifically 
labor mobility, is a critical factor in the advance of the U.S. 
economy.
    Wal-Mart hires dozens of new workers every day. And I know 
you're not fans of the Wal-Mart employment model, but how about 
Google? Google hired 2,000 workers last year, Genentech hired 
2,000 workers last year. XM and Sirius satellite hired over 
1,500 workers in the last 2 years, many of them engineers. The 
healthcare industry has created 3.5 million jobs in the last 10 
years. Colleges and universities and high schools have created 
2 million more jobs.
    So who are filling all of these jobs? We have 2 million new 
entrants into the labor market every year. Those are mostly 
teenagers and immigrants. They may be getting the jobs at Wal-
Mart; they're not getting the jobs at Google, Genentech or SM 
and Sirius satellite. Employers for those large corporations 
want workers with experience, skills and employment references. 
Where are they getting the workers?
    The answer is they're getting the workers from firms and 
industries that are in decline. The telephone industry has shed 
tens of thousands of workers. The auto industry has done the 
same thing and is now embarked on another wave of dislocations. 
Real estate brokers and mortgage bankers are now looking around 
for new jobs.
    So the point is the American economy thrives because we're 
able to move people out of declining industries into expanding 
ones. Is this job mobility good for the economy? Absolutely. 
It's what makes us so responsive to changes in technology, 
changes in trade, and changes in consumer taste. Without such 
mobility, our incomes might be more stable but they'd also be 
lower.
    So to get down to the policy implications here, I'm not 
denying that there's economic deprivation that results from 
income instability, but I would emphasize that economic 
depravation tends to be a relatively brief experience. Contrary 
to what you've heard so far, there is no evidence that income 
stability at the household level has increased. What you heard 
from Director Orszag is that macroinstability has decreased and 
we now have some numbers on household instability. But there is 
no evidence that household instability, income instability, has 
increased.
    Most of our instability, particularly the downward 
dislocations, are of relatively brief duration and our safety 
net programs are, for the most part, time limited. Unemployment 
insurance tops out at 26 weeks, our welfare benefits top out 
after 5 years, our trade adjustment assistance is time-limited 
as well, and I think these are appropriate responses to the 
instability that exists.
    I'm not saying that we should not take any further steps to 
improve the social safety net, but I do want to advocate some 
caution--blink a yellow light--and point out that any further 
expansions of the social safety net carry a risk. They impose 
higher costs on employers which will make them more reluctant 
to hire displaced workers and new entrants to the labor market 
and they may create additional disincentives for the workers 
themselves to take on new jobs in expanding industries. It's 
far better for the worker to grasp toe-holds in an expanding 
industry than to cling to a job that's in decline.
    Thank you.
    [The prepared statement of Dr. Schiller appears in the 
Submissions for the Record on page 91.]
    Chairman Schumer. Thank you. I want to thank all of our 
witnesses. We had a multiplicity of viewpoints here, and 
everyone got to their points. It was great.
    My first question goes to Mr. Emsellem about wage 
insurance. First, the bulk of your argument seems to be that 
this will take away from other programs, particularly trade 
adjustment assistance which has been notoriously poor. We had 
the exact same experience in New York. Workers are laid off, 
they qualify for trade adjustment TAA, but they don't get any 
money. This has happened over and over again, in Syracuse and 
Rochester and Buffalo.
    But just for the sake of argument, let's say that we had a 
good trade adjustment assistance program. Let's say we had a 
good unemployment assistance program. Would you then object to 
a wage insurance program to augment those rather than replace 
those in terms of either substance or dollars?
    Mr. Emsellem. At this point, yes. As I mentioned, there are 
a lot of other unanswered questions. The point is, we should be 
pursuing a good job strategy, that is really where we're coming 
from. We should be pursuing strategies that promote quality 
jobs, and there is no evidence that wage insurance does that. 
With $3.5 billion, you can put a lot of money into an 
initiative to promote good jobs.
    Chairman Schumer. Isn't training on the job the best 
training? It's been shown over and over again that employers 
who hire somebody and then train somebody, that's what really 
advances work more than--we've had lots of job training 
programs, I've supported many of them, where they train people 
for jobs and the jobs don't exist or they can't work out in the 
job--someone on the job.
    Again, this is not--you seem to be saying do it the old way 
we've done it all along, put more money into all of them and 
here's a new idea. That seems to me to make a good deal of 
sense. Not as a replacement; I'm wary of that. I'm careful of 
that admonition. But you're saying well, it's simply going to 
soften the blow of people, they're not going to take low wage 
jobs because of this. If someone can find--someone loses a 
$40,000 a year job and can find another $40,000 a year job, 
they're going to take it. But if the only job they can find is 
a $25,000 a year job and you can say OK, we're going to say 
your salary is going to be $33,000 for 2 years, that seems to 
me all to the good.
    I'll bet if you asked average workers, they'd all be for 
this kind of program. I'm going to go ask some of them in 
Syracuse and Buffalo who've been laid off at the $40- or 
$45,000 jobs. Again, I don't get the objection when we have 
such a problem here of saying well we're not sure it will work. 
We're sure a lot of other programs don't work.
    I could make the argument trade adjustment assistance 
doesn't work. We're never going to get the adequate funds for 
that. That pays people money without a job. What about paying 
people money with a job?
    Mr. Emsellem. Senator, you asked a lot of questions there.
    [Laughter.]
    Chairman Schumer. I'm going to give you a chance to answer, 
I just don't quite get it.
    Mr. Emsellem. Let me try to answer a couple of your points. 
First, training. There is no evidence--and that's my other 
point, there are a lot of unanswered questions about this 
program. There is no evidence that folks who take wage 
insurance because they're taking lesser paying jobs will 
receive any meaningful training or transferable skills.
    As for on-the-job training, the fact is that there are a 
lot of other options out there. But we're talking about jobs 
that involve lesser-paying work. We don't know, if you take a 
job at Wal-Mart----
    Chairman Schumer. Question: Do you think anyone takes a job 
for lesser-paying work if they can get a job for the same or 
more paying work?
    Mr. Emsellem. That's a different point.
    Chairman Schumer. That's the problem in the economy we 
face.
    Mr. Emsellem. I think it's more than that. I think it's a 
problem with what options are available to workers today. If 
the only option is wage insurance, that's one issue. If we can 
create better jobs, more quality jobs, and put a real 
initiative into resources that do that--and there are good 
training examples, lots of them in New York; I come from New 
York originally, I used to live there for a lot of years--a lot 
of good examples of training that have shown limited results on 
a national scale.
    But if you look at the good things that states are doing, 
sector kind of training, the sort of things that bring 
employers and business together----
    Chairman Schumer. Sir, I asked you a question. If we had 
unlimited resources, OK, and we put money into job training--
the kind of training before people get jobs, OK. Why wouldn't 
we do this as well?
    Mr. Emsellem. That's another question. I hope I've 
responded to the question.
    Chairman Schumer. But my general question is rather than 
say----
    Mr. Emsellem. If we had unlimited resources, Senator, I 
think the money could be much better spent than on wage 
insurance on an initiative that promotes good jobs along the 
lines of what the states are doing. Build up the sectors, the 
industries that are more competitive, put the money into those 
programs. That helps employers and helps workers and saves 
jobs. Wage insurance does none of that.
    Chairman Schumer. Give me one example of where you would 
put a large amount of money? I don't mean a small program that 
works somewhere, but when we've spent large amounts of money on 
job training the results are mixed at best.
    Mr. Emsellem. That's at a national scale, not at the 
individual level where you--and I'm not talking about small 
programs. I'm talking about where you take a look at what the 
interesting states are doing. In Wisconsin, there's a regional 
partnership set up between business and labor that's all about 
retooling the manufacturing industry. That has had major 
consequences for saving jobs and creating training that helps 
these workers and helps the states stay competitive.
    Chairman Schumer. Has the number of manufacturing jobs in 
Wisconsin stayed constant?
    Mr. Emsellem. In those areas they've put the resources 
into, yes, it's made a big difference, Senator. Let me just say 
in terms of what workers think it's an excellent question. Of 
course that's the first question that comes to your mind.
    In Canada, what we know is that 2 out of the 10 people--
only 2 out of 10 people who were in the control group where 
they could collect wage insurance took part in the program. 
When they did follow-up interviews to ask those folks what they 
thought about wage insurance, they said it's not relevant to my 
situation. You and me and most folks, we have the same 
reaction: I want to spend my time collecting my unemployment 
benefits and finding the best job that I can find. Wage 
insurance, you can't collect wage insurance if you're still on 
unemployment insurance.
    Chairman Schumer. But each worker could have an option. One 
worker might want to train and collect unemployment insurance, 
and another might want to take the $25, he may have real needs, 
or she. They may have to fund some medical illness, they may 
have to fund--and you're telling them you have to take 
unemployment insurance or a job training program. And some of 
them--not all, maybe not most--would say it's better for my 
situation to take the lower-paying job and at least make up 
half the difference.
    Mr. Emsellem. I'm saying the money should be spent on more 
quality jobs and just also a question.
    In Canada, what they found was 44 percent of the people who 
took wage insurance were still on wage insurance 2 years after 
the program, so they hit the max. That's a lot of people. What 
happens to those people when wage insurance is over? What have 
we done to improve their situation?
    Chairman Schumer. We should do all other things. But you're 
saying 56 percent weren't, that's pretty good.
    I look at a lot of job training programs and if they have a 
50 percent or over rate of success, I think they're pretty 
good.
    Do you want to comment on what Mr. Emsellem had to say, and 
then I'll yield to Senator Webb. Dr. Brainard.
    Dr. Brainard. I have to say I'm a little puzzled as well by 
the line of reasoning. The reality is people are taking lower-
paying jobs. That's the reality today. Two million displaced 
workers losing 16 percent of their income when they are re-
employed. If you look at manufacturing, 20 percent of their 
income--maybe 75,000 workers a year, maybe, end up in TAA.
    The GAO just did a good report on five different locations 
where TAA was administered. The portion who were in relevant 
training ranged from 9 to 39 percent at each site. 
Unfortunately, the workers who entered training--and I'm 
reading here--replaced slightly less in their wages than 
workers that didn't. Unfortunately, much as I would hope that 
TAA would be the answer and that training would lead to full 
replacement of earnings, the reality today is that people are 
taking lower paid jobs.
    In terms of the evidence, the evidence to me, the way I 
read the evidence--and again, you know, I agree, we don't have 
a lot of evidence out there, so I don't want to overstretch the 
amount that we can predict about what this program would do. 
The evidence was that the search was more intense, that people 
were motivated essentially but did not provide any evidence 
that I could see that they actually were motivated to take the 
first job that came along.
    People take jobs for very complicated reasons. They look at 
a whole host of factors. I don't read the evidence as 
suggesting that they took a lower-quality job--again, 
unfortunately I do read the evidence for the Nation as a whole 
that a lot of people are being forced into taking lower-quality 
jobs.
    Chairman Schumer. Senator Webb.
    Senator Webb. Thank you, Mr. Chairman. I have moved up to a 
better mike here.
    Professor Batchelder, you understand why you probably 
didn't want me near a microphone.
    I have a question for the Chairman. We have this bottled 
water here that has no label on it. I was wondering if it was 
part of the new ethics law that we're not allowed to do product 
placement. I find it very curious.
    Chairman Schumer. Just make sure it's water.
    Senator Webb. I would, first of all, like to thank all the 
panelists for their testimony. I'd like to take this in a 
little bit different direction.
    First of all, before I do that, Professor Batchelder, I 
agree with you from a totally different set of experiences that 
income averaging has its benefits, even if we're not looking at 
the way that incomes can fluctuate as a result of the sorts of 
issues we're talking about today.
    Again, as I said before, as someone that's in a profession 
where your income does vary greatly year by year, I found that 
when we did this that it was quite beneficial to be able to do 
basic planning, basic financial planning.
    But Dr. Brainard, I believe that you are at the right 
starting point here. When we're looking at these issues--and I 
appreciate all your comments talking about the impact of 
globalization on what we're doing. Wherever people come down on 
these issues, I don't think that there's a great deal of 
dispute in this country about the facts, specifically what has 
happened with the internationalization of corporate America. 
The question is where do we go for the answers on this issue?
    My view is that we have to come up with some sort of a 
competitive economic model that includes a strategy for good 
jobs for American workers so that they benefit and get a fair 
share of the growth of this economy. The data doesn't really 
show that happening.
    Mr. Emsellem, I take your point when you're talking about 
how Federal trade policy has contributed to this situation. If 
I were going to start with tax fairness, I would start with tax 
fairness in corporate America. That's not a slam on corporate 
America, just that corporate America has been able to take 
advantage of the trade practices that have gone through our 
government and, in many cases, American workers were not 
included in terms of being protected as we moved into the WTO.
    And another thing--and this goes basically to the question 
I'd like to throw at the panel--it seems to me that we need as 
a nation to come up somehow with a different way to make 
adjustments for how we're paying for pension and medical 
expenses that allows us to be more competitive and, over time, 
actually give a different kind of relief for our corporations.
    I am mindful of an article that was in The Economist last 
summer. As you know, it's very pro-business but they did a 19-
page special survey on the impact of globalization. The bottom 
line in The Economist's article was the United States is 
absorbing globalization differently than even other first-world 
nations because of a lot of the things that I just mentioned. 
And that if we don't find some solutions that we're going to 
end up with protectionism on the one hand and potentially 
social unrest on the other. So where do we really find these 
answers?
    I'm not taking a position even on the issue of wage 
insurance per se. I think it's a small piece of what we need to 
be looking at, and I'm interested in your-alls reactions. We'll 
just start with Dr. Brainard.
    Dr. Brainard. I think you're exactly right. My hope is that 
this Committee will be looking at some of the other pieces of 
that puzzle, too. A piece of the answer is that we have to do a 
better job of smoothing incomes and protecting those who might 
be shouldering, almost certainly are shouldering a 
disproportionate share of that burden of adjustment.
    But another big piece which I don't think has moved along 
as much as one would have liked, and we've been--over the last 
6 years we've seen very stark changes in the international 
economic landscape. We haven't seen very robust policy 
responses to it on areas like competitiveness and asking those 
kinds of questions about how we are preparing ourselves to 
continue to be among the highest wage earners in the 
international competitive arena.
    How are we going to do that? We're going to do it by 
investing in certain areas of value, and that means our 
workforce has to be prepared to be able to do that. It does go 
to education and workforce training and it goes to innovation 
policy and it goes to a whole host of things. It goes to 
infrastructure. Those questions I think are part and parcel of 
it.
    And of course--which you didn't raise, but asking questions 
about the extent to which the international rules are being 
advanced to favor U.S. interests I think is another really 
important question. Are we enforcing the rules that we've got 
and are we pushing forward those rules that are most 
consequential for us economically, as opposed to a set of 
foreign policy trade agreements, for instance.
    Mr. Emsellem. My field of expertise, is not globalization, 
but I know a little bit about how workers deal with these 
issues. I guess my response would be to obviously pursue the 
issue of healthcare and health insurance, our experience there.
    There are some states that are really doing some really 
novel things there to fund health insurance for folks who 
qualify for unemployment benefits.
    That makes a big difference in people's lives--just paying 
out the COBRA coverage and all that, takes a huge chunk of 
funds. If it was the same amount of wage insurance money, it 
could go toward that, and that would, we know, make a big 
difference.
    In the last recession, it was very interesting when 
Congress got back to the business of putting together an 
extension of the unemployment benefits for the workers who were 
laid off in the last recession.
    There was a lot of talk, and President Bush supported the 
idea of providing health insurance to unemployed workers. There 
is an opportunity there.
    We ended up with a little piece of a program in TAA, that 
has a lot of problems. That is a starting point, but it has a 
lot of problems. I think that's the area, from the perspective 
of workers who are struggling with these issues, that would be 
very important to pursue.
    Ms. Batchelder. It's a very interesting question, and, I 
think, first, we need to think seriously about moving away from 
a purely employer-based model for providing both pension 
coverage and health insurance.
    Also, the proposal to transform tax incentives into 
refundable credits, I think, would help a lot at the worker 
level. Right now, our tax incentives for both retirement 
savings and health insurance, are, of course, worth much more 
to a higher-income worker. For instance, the retirement savings 
incentive for the bottom 40 percent of the income distribution, 
they gain about 2 percent of all of the value of retirement 
savings incentives.
    The problem with this is not only that these are the 
workers that need incentives the most, but also that they're 
kind of being wasted, because we're often buying out the base, 
as we call it in tax lingo, where people who would already have 
health insurance, or would already be saving adequately for 
retirement, we're giving them an incentive they don't need.
    In the retirement savings context, often they will just 
shift their existing savings into the tax-deferred vehicle, and 
not necessarily increase their savings. So we can provide 
incentives a lot more efficiently.
    The other point I would make, is that it's really important 
to leverage insights from behavioral economics in both of these 
areas. In particular, looking at default rules, trying to make 
it easier for people to save, eliminating some of the 
administrative hassle and can often have a much greater impact 
than any tax incentive or financial incentive on increasing 
retirement savings.
    Dr. Schiller. Let me say that I'm concerned about the 
perceptions about globalization. Globalization has been a boon 
to the American economy. All this conversation focuses on 
import competition, but the export sector has been the fastest 
growing sector in the U.S. economy for the last 15 years. It's 
been a tremendous engine of growth.
    We point to the Chinese economy and people suggest that 
they are outdoing us. The Chinese have located four million 
manufacturing workers in the last 10 years, while their economy 
has grown, so it's technology that's improving so fast and 
dislocating workers in manufacturing; it's not trade, per se.
    Trade is an engine of growth for the U.S. economy.
    Senator Webb. If I may, on a couple of points: One is, we 
had a trade deficit last year of $832 billion, and just to nail 
down something we were talking about with Mr. Emsellem, the 
great concern I have when I look at our movement toward 
globalization through the different agreements, ending up with 
the WTO, is that there were no provisions that were directly 
protecting or standardizing the workforce.
    We could begin--it's very difficult to do with fast-track 
trade legislation, but we could begin to be asking for equal 
workplace environments in other countries, competitive 
countries, as a starting point on trying to protect American 
workers.
    It's no accident that China and India have the largest 
greenhouse effects in the world right now, because there are no 
standards in their workplaces like we enforce and demand in our 
own.
    There are ways that American workers are being affected, 
that do not go to the quality of the work or even the 
inequality of economic systems, that could be approached. Thank 
you, Mr. Chairman.
    Chairman Schumer. Thank you. I want to thank our panel. 
Certainly, I agree with Senator Webb, that we have to look at 
the macro picture, but I think that in this changing world, 
even if trade were not an issue, technology would cause lots of 
displacement here within America.
    We also have to look at the fact that individual workers 
are buffeted about more than they used to be. I think this was 
a very helpful hearing.
    Professor Batchelder, your ideas, I love the idea of making 
a credit. In fact, I've just proposed the college tuition 
deductibility, which is a law I authored. We combine all of 
those programs and make them into a credit, which makes a great 
deal of sense, and the idea of income-averaging, seems to make 
sense, as well.
    So I thank all of you. Wage insurance is one idea. It will 
be debated here. We'll see where to go with it. We're looking 
for other ideas. The Committee is going to look at both ends of 
this new international economy, the macro picture, which 
Senator Webb focused on, as well as more of the individual 
worker picture.
    One thing I would say to you, Dr. Schiller, is that the 
French students who were demonstrating, did not have wage 
insurance, because they weren't working.
    In any case, I thank all of you for being here, and would 
ask unanimous consent because Senator Brownback would like to 
submit some questions for the witnesses. Congresswoman Maloney 
would also like to submit questions, so, without objection, 
we'll ask that you respond to those questions within a week, if 
that's OK with you.
    [The material referred to was unavailable at press time.]
    Chairman Schumer. Thank you all for being here. It was a 
very informative panel. The hearing is adjourned.
    [Whereupon, at 11:05 a.m., the hearing was adjourned.]
                       Submissions for the Record

=======================================================================

[GRAPHIC] [TIFF OMITTED] 34852.001

       Prepared Statement of Senator Charles E. Schumer, Chairman
    Good morning. I would like to thank our witnesses and guests for 
attending today, and I want to welcome the new Vice Chair, my colleague 
from New York, Mrs. Maloney. I look forward to working closely with her 
to use this Committee as an engine for generating economic policies 
that will work to deliver the benefits of economic growth to all 
Americans.
    Today, we are at a critical juncture in U.S. economic policy. We 
know that the upheavals caused by technological change and 
international competition most acutely affect those who are gaining the 
least economically--the middle-class and those who aspire to get there. 
Yet in order for us to expand trade and make significant technological 
investments to help grow the economy, the middle-class must feel that 
they will benefit. Right now, too many of them don't.
    Working at a large corporation for thirty or forty years that takes 
care of you and your family for a lifetime is becoming a thing of the 
past. Employers are now shifting the high costs of health care and the 
burden of saving for retirement onto families. And increasingly, jobs 
are being automated away by technological advancements or moved 
overseas--leaving many displaced workers and their families behind.
    Meanwhile, official numbers on the economy have been positive--at 
least until very recently. But we must face the reality lurking behind 
the official numbers in order to address anxiety on Main Street.
    Not only have wages significantly lagged behind productivity over 
the past two decades, but they are increasingly more volatile as 
workers bounce in and out of jobs. Between 2003 and 2005, nearly 4 
million workers were laid off from jobs they held for more than 3 
years. About half of these workers and their families took a pay cut, 
and nearly one-third lost 20 percent or more of their prior earnings. 
And if the recession in the manufacturing sector that hit our radar 
screens this week spreads through our economy--the economic roller 
coaster for families will only get worse.
    Income volatility can cause major upheavals for families, on top of 
the changes they are facing in the workplace--they could be forced to 
sell their homes, or to discontinue health care coverage. Income 
volatility also leaves families feeling unsettled about their family's 
and their country's economic future.
    We need a new policy direction to meet the challenge of income 
instability. We must start by strengthening the safety net that helps 
displaced workers rebound from job losses that occur through no fault 
of their own.
    We have asked our witnesses on the second panel to share their 
recommendations for doing just that. This morning, our experts will 
explore new policies like wage insurance and income-averaging, as well 
as ways to strengthen our existing unemployment insurance and Trade 
Adjustment Assistance programs.
    We also need to do everything we can at the federal level to spur 
the development of high-quality, high-paying jobs to replace the jobs 
lost in declining segments of the economy or through advancements in 
technology. We need to make serious investments in our most promising 
industries for future growth, like renewable energy and life sciences.
    And we need to help our displaced workers acquire the skills and 
experience they will need to succeed in the new jobs created. We will 
investigate opportunities for creating good jobs in more detail in a 
series of JEC hearings in the coming months.
    But right now, middle-class families need help dealing with the 
tectonic shifts that technology is causing; they need help dealing with 
the forces beyond their control that are changing their lives. They 
don't want handouts, but they need a hand.
    I know we will have some disagreements over particular solutions to 
this problem of income instability, but I hope that we will all 
prioritize the need to help our families mitigate the new risks they 
face and achieve their aspirations. And I look forward to working 
closely with all of you to do just that.
    I've said before that the JEC would seek insight and advice from 
the best and that's what we have to offer here again today. I will now 
introduce today's panelists.
                               __________
  Prepared Statement of Representative Carolyn B. Maloney, Vice Chair
    Thank you, Chairman Schumer. I am pleased to welcome Director 
Orszag and our panel of witnesses to talk about the critically 
important issue of income instability and what we can do to help 
families manage the economic shocks they may experience.
    As Director Orszag points out, wild swings in the overall economy 
have been tempered, but the same cannot be said for the economic 
circumstances of families trying to adapt to a dynamic global economy. 
The Congressional Budget Office (CBO) has looked at this issue and 
found that households experience significant ups and downs in their 
earnings and income from year to year, and the downside problem may be 
getting worse due to the forces of globalization and technological 
change. Not surprisingly, the income roller coaster is a particularly 
rough ride if you are less educated.
    Our second panel of witnesses will touch on various proposals to 
address income instability. I know that they--like the members of this 
committee--will be coming at these issues from different perspectives, 
but I look forward to a serious policy discussion and competition among 
ideas. One idea that we will focus on today is wage insurance. Our 
Chairman is planning to introduce legislation on this issue, which will 
no doubt generate further useful debate about what is the best way to 
deal with the adverse side effects of economic change.
    Dr. Brainard has offered a wage insurance proposal with her 
Brookings colleagues to provide economic incentives for more rapid 
reemployment and on-the-job training. I certainly agree with the goal, 
but not necessarily the game plan for getting there. As Dr. Brainard 
observes, our nation's safety net has ``more holes than netting'', 
which is why I think we should mend it before we make it bigger, as Mr. 
Emsellem urges. Wage insurance may well have a role to play, but 
implementing it should not come at the expense of shoring up the 
Unemployment Insurance system or Trade Adjustment Assistance, both of 
which are in dire need of reform.
    Finally, CBO data show how the tax code can exacerbate the income 
volatility, especially for low-income taxpayers. Prof. Batchelder 
proposes novel changes to the tax code so that low-income families, 
whose incomes tend to fluctuate the most, could average their income 
over two years to smooth out variability, and enjoy similar tax 
advantages as businesses in their ability to shift unused deductions 
and exemptions.
    As an aside, I want to note that CBO examined earnings and income 
volatility using the Survey of Income and Program Participation, the 
SIPP, a leading source of comprehensive data on the economic well-being 
of American families. Last year there was an effort by the 
Administration to eliminate the SIPP without having an adequate plan in 
place to collect this invaluable information. The status of the SIPP 
remains up in the air, and I hope, Director Orszag, that you will join 
the growing chorus of researchers and academics who have called on the 
Administration to preserve this survey until a better one can be 
designed and implemented.
    I look forward to the testimony of our witnesses and their thoughts 
on policies that can help families better manage income instability.
  Prepared Statement of Hon. Peter R. Orszag, Director, Congressional 
                            Budget Office\*\
---------------------------------------------------------------------------
     Some of the figures in this testimony use shaded vertical bars to 
indicate periods of recession. (A recession extends from the peak of a 
business cycle to its trough.)
    Numbers in the text and tables may not add up to totals because of 
rounding.
---------------------------------------------------------------------------
    Chairman Schumer, Vice-Chair Maloney, Congressman Saxton, and 
Members of the Committee, I appreciate the invitation to participate in 
today's hearing. My testimony makes four main points:

     First, macroeconomic volatility--the ups and downs of overall 
economic growth and inflation--has declined and is now relatively low. 
In particular, year-to-year fluctuations in the economy have become 
smaller than in the past.
     Second, despite the relatively modest volatility in the overall 
economy, workers and households still experience substantial 
variability in their earnings and income from year to year. The 
Congressional Budget Office's (CBO's) analysis shows, for example, that 
between 2001 and 2002, one in four workers saw his or her earnings 
increase by at least 25 percent, while one in five saw his or her 
earnings decline by at least 25 percent. Some of that variability stems 
from voluntary actions, such as a decision to stay home and rear 
children, and some stems from involuntary events, such as the loss of a 
job. Earnings volatility is somewhat higher for people with less 
education.
     Third, although earnings and income volatility is substantial, 
more research is required to determine how and when that variability 
has changed over the past few decades. The existing evidence suggests 
that annual earnings have tended to fluctuate more, on a percentage 
basis, over the past 25 years than they did during the 1970s. The 
number of studies on the topic is limited, however, and they have 
somewhat different results. Therefore, it is too early to reach firm 
conclusions about the precise timing or magnitude of any increase. 
Given their importance, trends in earnings and income volatility seem 
to warrant significant research attention.
     Fourth, many observers are accustomed to thinking about the 
Federal tax system as an ``automatic stabilizer'' that helps to reduce 
variations in national income. The tax system, though, also helps to 
smooth out variability at the level of households by reducing year-to-
year fluctuations in their after-tax income. That insurance effect of 
the tax system is potentially significant, given the substantial 
variation in households' earnings and income. At the same time, 
however, the tax system levies higher average rates on households whose 
income is more variable and imposes costs on the economy by distorting 
the decisions that households make about how much to work, how much to 
save, and how to receive their compensation for doing so. In evaluating 
different tax structures, policymakers need to weigh the role of the 
tax system in smoothing income against its other effects on households 
and the economy.
                        macroeconomic volatility
    Macroeconomic volatility has been significantly lower during the 
past 20 years than in preceding decades. Although recessions can still 
be quite painful for particular sectors and workers, recessions have 
been less severe overall--in duration, frequency, and magnitude--than 
they were between 1950 and the mid-1980s. The quarter-to-quarter 
fluctuations in real (inflation-adjusted) gross domestic product (GDP) 
have also become smaller (see the top panel of Figure 1). In addition, 
the level and volatility of inflation over the past 20 years have also 
been relatively low (see the bottom panel of Figure 1). Volatility in 
more recent years has been less than half that of the previous period 
(see Table 1). The corresponding reduction in people's uncertainty 
about prices allows them to plan better for the future. Volatility has 
declined not only in the growth of overall GDP and inflation but also 
in virtually all of the major components of GDP and in aggregate 
unemployment, wages, and income.
[GRAPHIC] [TIFF OMITTED] 34852.002


              Table 1.--Changes in Macroeconomic Volatility
------------------------------------------------------------------------
                                                        Volatility
                                                 -----------------------
                                                   1950-1984   1985-2005
------------------------------------------------------------------------
GDP Growth......................................         3.1         1.4
Inflation.......................................         2.9         1.0
------------------------------------------------------------------------
Sources: Congressional Budget Office; Department of Commerce, Bureau of
  Economic Analysis.
Note: Volatility is measured as the standard deviation of the change
  from the previous year in gross domestic product (GDP) per capita (for
  GDP growth) and in the chained price index for personal consumption
  expenditures (for inflation), in each case using quarterly data.


    Although there is no conclusive explanation for the decline in the 
volatility of GDP growth and inflation, numerous reasons have been 
advanced, many of which are closely interrelated. The proposed 
explanations fall into four broad categories.

     A More ``Flexible'' Economy. Improvements in production processes 
and investments in information technologies (such as those that 
facilitate just-in-time inventory management), increases in temporary 
and flexible work arrangements, and the deregulation of many industries 
(especially in the transportation sector) have made it possible for the 
economy to adjust much more smoothly to changes in the availability of, 
or demand for, goods and services. The economy an more easily adapt to 
shocks, such as the energy price shock of 2004 and 2005, without large 
changes in output or large jumps in inflation.\1\
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, The Economic Effects of Recent 
Increases in Energy Prices (July 2006). See also Lawrence F. Katz and 
Alan B. Krueger, ``The High Pressure U.S. Labor Market of the 1990s,'' 
Brookings Papers on Economic Activity, no. 1 (1999).
---------------------------------------------------------------------------
     Improvements in Financial Markets and Institutions. Financial 
innovations since the 1970s have enhanced businesses' and households' 
access to credit and thereby enabled them to borrow more readily when 
their income turns down. Those innovations include improved assessment 
and pricing of risk (including the development of credit derivatives 
and interest rate swaps) and the greater use of financial markets in 
supplying credit (through securitization, for example).\2\ In addition, 
changes in government regulations have allowed more diversification in 
banking and made housing financing more stable. Even though those 
changes in capital markets seem esoteric, they appear to have broadened 
and deepened access to credit for both businesses and households and to 
have improved the resiliency of the financial system by spreading the 
risk of default more widely and efficiently.
---------------------------------------------------------------------------
    \2\ Securitization involves the conversion of cash flows into 
securities; credit derivatives are financial instruments designed to 
transfer credit risk from one party to another; and interest rate swaps 
are exchanges of two series of payments based on different interest 
rates, which entities undertake to manage their exposure to changes in 
rates.
---------------------------------------------------------------------------
     Management of Monetary Policy. During the past two decades, the 
Federal Reserve has shown a strong commitment to keeping inflation low 
and stable. Its actions to reduce and contain inflationary pressures 
seem, in turn, to have stabilized firms' and households' expectations 
of future inflation. As a result, the Federal Reserve has not needed to 
respond as forcefully as in the past to dampen swings in expectations 
of inflation or to bring inflation down from a high level. The result 
may be reduced macroeconomic volatility.
     Fewer Shocks to the Economy. This explanation--that fewer shocks 
to the economy, particularly the worldwide economy, have occurred--was 
proposed before the rapid rise in oil prices from 2004 to mid-2006. 
Given the mild effect of that oil price shock on economies worldwide, 
the explanation now seems less persuasive. Moreover, overall U.S. 
economic growth was little affected by other major shocks during the 
past 20 years, such as the Asian currency crisis of 1997, the Russian 
debt crisis of 1998, and the terrorist attacks of September 11, 2001.
                workers' earnings and households' income
    The story at the level of the individual worker or household is 
different from the story at the macroeconomic level. Individual 
earnings tend to rise over time, but the data suggest that workers and 
families experience substantial volatility year to year around that 
underlying trend.
    To examine earnings and income volatility, CBO analyzed recent data 
from the Survey of Income and Program Participation (a data set 
collected by the U.S. Census Bureau). The analysis focused on workers 
who were 25 to 55 years old and not in school, so it therefore does not 
capture changes in earnings associated with graduating from school or 
leaving work for school.\3\ Even so, the analysis shows substantial 
variation in workers' before-tax earnings from 2001 to 2002. After an 
adjustment for inflation, one in four workers saw his or her earnings 
increase by at least 25 percent, while one in five saw his or her 
earnings decline by at least 25 percent. A substantial portion of 
workers, 11 percent, saw their earnings decline by at least half (see 
Figure 2).
---------------------------------------------------------------------------
    \3\ For a discussion of wage trends in low-wage labor markets, see 
Congressional Budget Office, Changes in Low-Wage Labor Markets Between 
1979 and 2005 (December 2006).

[GRAPHIC] [TIFF OMITTED] 34852.003


    Workers with less education tend to experience more volatility in 
their earnings than do workers with more education (see Table 2). For 
example, from 2001 to 2002, 16 percent of workers without a high school 
education had their earnings decline by 50 percent or more, compared 
with 10 percent of workers with more than a high school education.

 Table 2.--Distribution of Changes in Workers' Annual Earnings from 2001 to 2002, by Educational Attainment and
                                                       Age
----------------------------------------------------------------------------------------------------------------
                                                  Decrease in Earnings of   Changes in   Increase in Earnings of
                                                         At Least          Earnings of          At Least
                                                --------------------------  Less Than  -------------------------
                                                  50 Percent   25 Percent   25 Percent   25 Percent   50 Percent
----------------------------------------------------------------------------------------------------------------
All Workers....................................         10.7         19.8         55.5         24.7         14.2
Educational Attainment
  Less than high school........................         15.6         26.0         47.9         26.0         16.4
  High school..................................         11.6         19.8         55.0         25.2         14.8
  More than high school........................          9.5         18.8         57.0         24.2         13.6
Age
  25 to 30.....................................         11.4         20.0         53.8         26.2         14.6
  31 to 40.....................................         10.7         19.8         54.5         25.7         14.9
  41 to 55.....................................         10.5         19.7         56.7         23.6         13.7
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the 2001 panel of the Bureau of the Census's Survey of
  Income and Program Participation.
Note: The sample consists of individuals ages 25 to 55 in 2001 who had positive earnings in 2001 and were not
  enrolled in school that year or in 2002. Earnings are inflated to 2002 dollars using the research series of
  the consumer price index for urban consumers.


    Such fluctuations in earnings can result from many sources, 
including job changes, job losses, job gains, voluntary exits from the 
labor force to care for children or other family members, changes in 
the number of hours worked per year, or changes in the wage rate 
received by workers. Among workers who experienced at least a 50 
percent drop in earnings, most did not work at least a month and 
typically did not work eight months in 2002. When asked why they were 
not working, the most common responses were that they were caring for a 
child or other family member or were pregnant; were not able to find 
work or had been laid off; were unable to work because of disability, 
illness, or injury; or were not interested in working or were 
retired.\4\ The responses appear to be split evenly between those 
suggesting that the departure from the labor force was voluntary and 
those suggesting that it was not.
---------------------------------------------------------------------------
    \4\ Only those individuals who had at least four consecutive months 
without a job responded to the question.
---------------------------------------------------------------------------
    Total household income consists not only of the earnings of 
household members but also other sources of cash income such as 
unemployment insurance, retirement income, dividends, and interest. 
Compared with earnings, it thus represents a broader measure of the 
economic resources available to individuals.\5\ Like workers' earnings, 
household income can vary from year to year, though it tends to be less 
variable than individual earnings. First, if an individual worker in a 
household with multiple earners loses a job, the earnings of the other 
members may partially mitigate the consequences of the job loss. 
Second, a loss in earned income may be alleviated by an increase in 
other sources of income, like unemployment insurance, payments from a 
retirement plan, or disability insurance. Neither the mitigating 
effects of the presence of other earners in the household nor the 
potential for increases in nonlabor income is captured in the more 
narrow measure of individual earnings.
---------------------------------------------------------------------------
    \5\ Household income, as reported here, is before-tax income and 
excludes capital gains and losses.
---------------------------------------------------------------------------
    To be sure, household income can vary from changes in the 
composition of households. Households are not fixed entities: They 
often evolve, as couples marry, separate, or divorce and working 
children move out of or into the house.
    According to CBO's analysis, the growth of before-tax income varied 
substantially among households between 2001 and 2002 (see Figure 3). 
Nearly one in four households experienced an increase in income of at 
least 25 percent, virtually identical to the number of individuals who 
experienced a similar percentage increase in earnings. Fewer 
households, one in seven, experienced a decrease in income of at least 
25 percent. And one in 25 households experienced a decrease in income 
of at least 50 percent--compared with one in nine individuals who 
experienced such a decline in earnings. Unlike the variability of 
earnings, however, the variability of household income seems similar 
across education levels (see Table 3).
[GRAPHIC] [TIFF OMITTED] 34852.004


 Table 3.--Distribution of Changes in Households' Annual Income from 2001 to 2002, by Educational Attainment and
                                        Age of the Head of the Household
----------------------------------------------------------------------------------------------------------------
                                                 Decrease in Income of At   Changes in  Increase in Income of At
                                                           Least            Income of             Least
                                                --------------------------  Less Than  -------------------------
                                                  50 Percent   25 Percent   25 Percent   25 Percent   50 Percent
----------------------------------------------------------------------------------------------------------------
All Households.................................          4.3         14.2         62.2         23.6         12.5
Educational Attainment of the Head of the
 Household
  Less than high school........................          4.3         14.6         62.1         23.3         12.6
  High school..................................          4.2         13.8         61.9         24.2         12.6
  More than high school........................          4.3         14.3         62.3         23.3         12.4
Age of the Head of the Household
  25 to 30.....................................          4.2         14.8         59.3         26.0         13.8
  31 to 40.....................................          4.3         14.7         59.6         25.7         13.6
  41 to 55.....................................          4.8         15.1         61.2         23.7         12.1
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the 2001 panel of the Bureau of the Census's Survey of
  Income and Program Participation.
Note: The sample consists of households in January 2001 that were surveyed for all of that year and 2002.
  Income, which is before taxes, includes earnings, unemployment compensation, workers' compensation, Social
  Security benefits, Supplemental Security Income, public assistance, veterans' payments, survivors' benefits,
  disability benefits, pension or retirement income, interest, dividends, rents, royalties, income from estates
  or trusts, alimony, child support, financial assistance from outside the household, and other cash income.
  Income is inflated to 2002 dollars using the research series of the consumer price index for urban consumers.


    For another point of comparison, CBO conducted a similar analysis 
using data from 1997 to 1998--a period of relatively rapid economic 
growth, in contrast to the relatively slow growth from 2001 to 2002--
and found similar results.\6\ Thus, substantial variability in workers' 
earnings and income can occur in periods of both strong and weak 
economic growth.
---------------------------------------------------------------------------
    \6\ The data are from the 1996 and 2001 panels of the Survey of 
Income and Program Participation, conducted by the U.S. Census Bureau.
---------------------------------------------------------------------------
    Using surveys to measure the year-to-year variability in earnings 
and income is complicated by the fact that individuals' responses are 
often in error (which could either overstate or understate the actual 
changes in earnings or income).\7\ In addition, while the surveys are 
intended to be nationally representative, they may not include 
undocumented workers and can be subject to biases because some people 
either refuse to respond at all or drop out of the surveys before their 
completion. An important question, then, is whether, over longer 
periods of time, earnings and income volatility has increased. 
According to most studies on the topic, earnings have tended to 
fluctuate more, on a percentage basis, over the past 25 years than they 
did during the 1970s.\8\ Relative to other questions about income and 
earnings, however, the trend in their volatility has received 
relatively little research attention. More research is therefore needed 
before firm conclusions about the precise time trend in earnings and 
income volatility can be reached.
---------------------------------------------------------------------------
    \7\ See John Bound and Alan B. Krueger, ``The Extent of Measurement 
Error in Longitudinal Surveys: Do Two Wrongs Make a Right?'' Journal of 
Labor Economics, vol. 9, no. 1 (January 1991), pp. 1-24.
    \8\ See, for example, Peter Gottschalk and Robert Moffitt, ``The 
Growth of Earnings Instability in the U.S. Labor Market,'' Brookings 
Papers on Economic Activity, no. 2 (1994); Costas Meghir and Luigi 
Pistaferri, ``Income Variance Dynamics and Heterogeneity,'' 
Econometrica, vol. 72, no. 1 (2004), pp. 1-32; Maury Gittleman and Mary 
Joyce, ``Earnings Mobility in the United States, 1967-91,'' Monthly 
Labor Review, vol. 118, no. 9 (September 1995), pp. 3-13; and Peter 
Gottschalk and Robert Moffitt, ``Trends in the Transitory Variance of 
Earnings in the United States,'' Economic Journal, vol. 112, no. 478 
(2002), pp. 68-73.
---------------------------------------------------------------------------
    To the extent that variability in earnings and income has 
increased, the phenomenon may be consistent with--and indeed perhaps 
part of the explanation of--the decreased macroeconomic volatility 
described earlier. For example, more-flexible labor markets could 
enable the economy to adjust to changes in the economic environment 
more quickly but also could mean that individuals change jobs and have 
their wages change more frequently.
            risk sharing, income fluctuations, and taxation
    Economists have long noted that the tax system serves as an 
automatic stabilizer that offsets at least part of demand shocks to the 
economy.\9\ A decline in aggregate before-tax income of one dollar 
generates a decline in aggregate after-tax income of less than one 
dollar. As a result, the tax system helps to stabilize demand for goods 
and services, which in turn helps to reduce fluctuations in the overall 
economy.\10\
---------------------------------------------------------------------------
    \9\ See Alan J. Auerbach and Daniel Feenberg, ``The Significance of 
Federal Taxes as Automatic Stabilizers,'' Journal of Economic 
Perspectives, vol. 14, no. 3 (Summer 2000), pp. 37-56; and Thomas J. 
Kniesner and James P. Ziliak, ``Tax Reform and Automatic 
Stabilization,'' American Economic Review, vol. 92, no. 3 (June 2002), 
pp. 590-612.
    \10\ The stabilizing effect of the tax system on the overall 
economy reached a peak around 1980 and by 1995 had declined to about 
the same level as in the 1960s. Since 1995, according to CBO's 
estimates, there has been relatively little change. Those movements 
mirror the increase and then the decline in effective tax rates. See 
Auerbach and Feenberg, ``The Significance of Federal Taxes as Automatic 
Stabilizers.''
---------------------------------------------------------------------------
    In addition to its well-recognized role as a macroeconomic 
automatic stabilizer, the tax system can serve as a microeconomic 
automatic stabilizer by helping to smooth out variability at the level 
of workers' earnings and households' income.\11\ The tax system 
automatically reduces the tax burden when before-tax income declines 
and automatically raises the burden when before-tax income rises. 
After-tax income therefore tends to vary less than before-tax 
income.\12\ In that way, the tax system provides a form of after-tax 
earnings or income insurance, which complements the social insurance 
provided through a variety of government programs. (Although the 
Federal tax system generally works to smooth out fluctuations in 
income, that attribute does not apply for each and every taxpayer.\13\)
---------------------------------------------------------------------------
    \11\ See Hal R. Varian, ``Redistributive Taxation as Social 
Insurance,'' Journal of Public Economics, vol. 14, no. 1 (August 1980), 
pp. 49-68; Jonathan Eaton and Harvey S. Rosen, ``Labor Supply, 
Uncertainty, and Efficient Taxation,'' Journal of Public Economics, 
vol. 14, no. 3 (December 1980), pp. 365-374; Jonathan Eaton and Harvey 
S. Rosen, ``Taxation, Human Capital, and Uncertainty,'' American 
Economic Review, vol. 70, no. 4 (September 1980), pp. 705-715; Jonathan 
Eaton and Harvey S. Rosen, ``Optimal Redistributive Taxation and 
Uncertainty,'' Quarterly Journal of Economics, vol. 95, no. 2 
(September 1980), pp. 357-364.
    \12\ Variability of income can be measured in different ways. Some 
analysts measure it as the change in dollar income; other analysts 
measure it as the percentage change in income. A pure proportional tax 
system can reduce the dollar amount of variability but does not affect 
the variability in percentage terms; a progressive tax system can 
reduce variability by both measures.
    \13\ See Robert Moffitt and Michael Rothschild, ``Variable Earnings 
and Nonlinear Taxation,'' Journal of Human Resources, vol. 22, no. 3 
(Summer 1987), pp. 405-421. For example, the payroll tax for the Old-
Age, Survivors, and Disability Insurance program does not apply to 
earnings above the taxable maximum ($97,500 in 2007). As a result, when 
earnings fluctuate across that threshold, after-tax earnings can be 
more variable in percentage terms than before-tax earnings.
---------------------------------------------------------------------------
    The risk-sharing features of the tax system can be illustrated in a 
simple example (see Table 4). Consider a single worker earning $45,000 
in 2006 with no other sources of income. At that level of income, the 
worker would owe $5,695 in Federal income taxes and $3,443 in payroll 
taxes and would therefore have $35,863 in after-tax income. If the 
worker's earnings fell by 20 percent, to $36,000, after-tax earnings 
would decline to $29,491. Although before-tax earnings fell by $9,000 
(20 percent), after-tax earnings declined by only $6,372 (18 percent).

   Table 4.--Effect of Taxes on the Variability of Income: An Example
                                (Dollars)
------------------------------------------------------------------------
                                                        Change in Wages
                                   Initial    Lower  -------------------
                                    Wages     Wages    Dollars   Percent
------------------------------------------------------------------------
Before-Tax Wages................    45,000    36,000    -9,000       -20
Income Taxes....................     5,695     3,755  ........  ........
Payroll Taxes...................     3,443     2,754  ........  ........
                                 --------------------
  Total taxes...................     9,138     6,509  ........  ........
After-Tax Wages.................    35,863    29,491    -6,372       -18
------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: Based on the tax schedule for a single worker in 2006.


    The predictability of households' income will affect how much value 
they place on the insurance provided through the tax system. To the 
extent that swings in earnings or income are unpredictable, households 
will tend to value the insurance more. However, the value of that 
insurance will be smaller for households whose earning or income swings 
are largely expected or stem from intentional decisions about how much 
and when to work.
    The insurance provided by the progressive tax system to households 
with variable income comes at a price: it can reduce average after-tax 
income for such households. Consider two people who have the same 
amount of lifetime earnings; one has steady earnings and the other, 
large swings in earnings. Under a progressive tax system based on 
annual income, the steady earner pays less in taxes over a lifetime 
even though both people have the same total amount of earnings. Thus, 
progressive taxation combined with an annual accounting period fails to 
treat people in similar circumstances in the same way. Various options 
for changing the tax system would alter the tradeoff between the income 
smoothing insurance provided and the average cost imposed on households 
with variable income.
    In addition to that tradeoff between the insurance provided to and 
the price paid by households with variable income, any risk-sharing 
benefits that the tax system generates must be weighed against the 
potential costs that it imposes on the economy at large. Marginal tax 
rates affect households' decisions about how much to work and save, as 
well as the form in which to receive compensation for doing so, and 
those distortions reduce the efficient operation of the economy. The 
implicit insurance that the government provides through the tax system 
may have other effects, such as changing the types and forms of 
insurance products offered by the private markets or encouraging people 
to take risks they would not take in the absence of that implicit 
insurance.\14\
---------------------------------------------------------------------------
    \14\ See Dirk Krueger and Fabrizio Perri, ``Public Versus Private 
Risk Sharing'' (working paper, December 2005).
---------------------------------------------------------------------------
    Comparing the various costs and benefits is difficult, and a 
complete accounting of all of those effects has not yet been achieved. 
Nonetheless, some recent studies have found that, compared with some 
alternatives, the current tax system may provide insurance benefits 
that are larger than the costs that it imposes on the economy by 
distorting decisions about working and saving.\15\ However, those 
analyses depend on many assumptions, and alternative assumptions could 
yield different estimates, so the studies should be viewed with 
caution. Despite those caveats, a reasonable conclusion from this new 
research is that the income-smoothing insurance provided through the 
tax system could be quantitatively important and should be taken into 
account in any analysis of the relative costs and benefits of different 
tax systems.
---------------------------------------------------------------------------
    \15\ See Shinichi Nishiyama and Kent Smetters, ``Consumption Taxes 
and Economic Efficiency with Idiosyncratic Wage Shocks,'' Journal of 
Political Economy, vol. 113, no. 5 (October 2005), pp. 1088-1111; Juan 
Carlos Conesa and Dirk Krueger, ``On the Optimal Progressivity of the 
Income Tax Code,'' Journal of Monetary Economics, vol. 53, no. 7 
(October 2006), pp. 1425-1450.
---------------------------------------------------------------------------
    Finally, it is important to note that the benefits of risk sharing 
and the costs of distortions are not captured by changes in GDP. 
Although GDP is a useful summary measure that may be related to 
households' well-being, it does not measure the value that households 
place on smoother incomes or the cost of distorted decisionmaking. 
Instead, GDP is merely a measure of how much output the market economy 
produces using its capital, labor, and technology. It does not measure 
what ultimately matters and what needs to be measured: changes in the 
well-being of households.
                               conclusion
    The U.S. economy has become less volatile: Macroeconomic 
fluctuations are now much milder than they were in the past. At the 
same time, however, households continue to experience substantial 
variability in their earnings and income, and that variability may now 
be greater than in the past--perhaps contributing to anxiety among 
workers and families. The tax system can help to smooth fluctuations in 
income not only at the macroeconomic level but also at the level of 
workers and households. The income insurance provided as a result may 
be quite valuable but needs to be weighed against the other effects of 
the tax system.
[GRAPHIC] [TIFF OMITTED] 34852.011

[GRAPHIC] [TIFF OMITTED] 34852.012

[GRAPHIC] [TIFF OMITTED] 34852.013

  Attachment, Analysis, Congressional Budget Office, Health and Human 
                           Resources Division

          Trends in Earnings Variability Over the Past 20 Years
                              (April 2007)
------------------------------------------------------------------------
                          Contents                               Page
------------------------------------------------------------------------
Methodology................................................           44
Analysis of Variability Using Administrative Data..........           45
Analysis of Variability Using Survey Data..................           47
Conclusion.................................................           47
Appendix: Alternative Measures of Earnings Variability.....           57
Tables
  1. Percentage of Workers for Whom Total Wage Earnings               47
   Dropped or Rose by 50 Percent or 25 Percent, by 10-Year
   Age Category............................................
  2. Distribution of Changes in Workers' Annual Real                  48
   Earnings, by Educational Attainment and Age, 2001 to
   2002....................................................
Figures
  1. Percentage of Workers for Whom Total Wage Earnings               49
   Declined by 50 Percent or More Over the Previous Year,
   by Sex..................................................
  2. Percentage of Workers for Whom Total Wage Earnings               50
   Declined by 25 Percent or More Over the Previous Year,
   by Sex..................................................
  3. Percentage of Workers for Whom Total Wage Earnings               51
   Rose by 50 Percent or More Over the Previous Year, by
   Sex.....................................................
  4. Percentage of Workers for Whom Total Wage Earnings               52
   Rose by 25 Percent or More Over the Previous Year, by
   Sex.....................................................
  5. Standard Deviation of the Percentage Change in                   53
   Workers' Total Wage Earnings Over the Previous Year, by
   Sex.....................................................
  6. Percentages of Workers Without Any Total Wage Earnings           54
   in the Previous or Subsequent Calendar Years............
  7. Percentage of Workers in the Bottom Two-Fifths of the            55
   Earnings Distribution for Whom Annual Social Security
   Taxable Earnings Declined by 50 Percent or More Over the
   Previous Year, by Sex...................................
  8. Percentage of Workers in the Bottom Two-Fifths of the            56
   Earnings Distribution for Whom Annual Social Security
   Taxable Earnings Declined by 25 Percent or More Over the
   Previous Year, by Sex...................................
  9. Distribution of Changes in Workers' Annual Real                  57
   Earnings, 2001 to 2002..................................
  A-1. Percentage of Workers for Whom Total Wage Earnings             60
   Declined by 50 Percent or More Over the Previous Five
   Years, by Sex...........................................
  A-2. Percentage of Workers for Whom Total Wage Earnings             61
   Declined by 25 Percent or More Over the Previous Five
   Years, by Sex...........................................
  A-3. Percentage of Workers for Whom Total Wage Earnings             62
   Rose by 50 Percent or More Over the Previous Five Years,
   by Sex..................................................
  A-4. Percentage of Workers for Whom Total Wage Earnings             63
   Rose by 25 Percent or More Over the Previous Five Years,
   by Sex..................................................
  A-5. Standard Deviation of the Percentage Change in                 64
   Workers' Total Wage Earnings Over the Previous Five
   Years, by Sex...........................................
  A-6. Percentage of Workers for Whom the Log of Total Wage           65
   Earnings Declined by 50 Percent or More Over the
   Previous Year, by Sex...................................
  A-7. Percentage of Workers for Whom the Log of Total Wage           66
   Earnings Declined by 25 Percent or More Over the
   Previous Year, by Sex...................................
  A-8. Percentage of Workers for Whom the Log of Total Wage           67
   Earnings Rose by 50 Percent or More Over the Previous
   Year, by Sex............................................
  A-9. Percentage of Workers for Whom the Log of Total Wage           68
   Earnings Rose by 25 Percent or More Over the Previous
   Year, by Sex............................................
  A-10. Standard Deviation of the Difference in the Log of            69
   Workers' Total Wage Earnings from the Previous Year, by
   Sex.....................................................
  A-11. Percentage of Workers for Whom Total Age-Adjusted             70
   Wage Earnings Declined by 50 Percent or More Over the
   Previous Five Years, by Sex.............................
  A-12. Percentage of Workers for Whom Total Age-Adjusted             71
   Wage Earnings Declined by 25 Percent or More Over the
   Previous Five Years, by Sex.............................
  A-13. Percentage of Workers for Whom Total Age-Adjusted             72
   Wage Earnings Rose by 50 Percent or More Over the
   Previous Five Years, by Sex.............................
  A-14. Percentage of Workers for Whom Total Age-Adjusted             73
   Wage Earnings Rose by 25 Percent or More Over the
   Previous Five Years, by Sex.............................
  A-15. Standard Deviation of the Difference in the Log of            74
   Workers' Total Age-Adjusted Wage Earnings from the
   Previous Five Years, by Sex.............................
------------------------------------------------------------------------

         Trends in Earnings Variability Over the Past 20 Years
    In response to a request from Senators Charles Schumer and Jim 
Webb, the Congressional Budget Office (CBO) analyzed the extent to 
which workers' earnings vary from year to year and whether that 
variability has increased over the past 20 years. To analyze those 
issues, CBO used data and techniques it has developed for projecting 
individual earnings in its long-term model for Social Security and 
Medicare.\1\ Understanding past trends in variability is key for 
projecting future earnings patterns, and those patterns are an 
important input into CBO's projections for Social Security and Medicare 
(because revenues and outlays are directly tied to individual workers' 
earnings through tax and benefit formulas).
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, Projecting Labor Force 
Participation and Earnings in CBO's Long-Term Microsimulation Model 
(October 2006).
---------------------------------------------------------------------------
    For its analysis, CBO used data from the Social Security 
Administration's Continuous Work History Sample (CWHS) and the U.S. 
Census Bureau's Survey of Income and Program Participation (SIPP). 
Although the use of the CWHS allows for a more accurate picture of the 
extent of earnings variability than do survey data, the analysis based 
on the CWHS is limited in several ways. Most notably, aside from age 
and sex, no information on workers' characteristics is available. Nor 
is any information available on the reasons for changes in workers' 
earnings. CBO therefore supplemented administrative data from the CWHS 
with data from the SIPP, which contains information on workers' levels 
of education and the reasons for which many workers experience large 
declines in earnings--such as illness, unemployment, or exiting the 
labor force to have or care for children.
                              methodology
    In its analysis of administrative records, CBO looked at a sample 
of workers whose earnings information was collected by the Social 
Security Administration between 1980 and 2003. The measure of annual 
total wage earnings available for this analysis includes wage and 
salary earnings, tips, and some other sources of compensation; it 
excludes self-employment earnings and deferred compensation. The 
measure also includes earnings above the maximum amount subject to the 
Social Security payroll tax. Earnings are indexed to 2006 dollars using 
the research series for the consumer price index for all urban 
consumers. The analysis focuses on workers who were between 22 and 59 
years old at any time during the 1980-2003 period.
    For each worker, CBO calculated the percentage change in earnings 
from one year to the next.\2\ CBO then calculated, in each year from 
1981 to 2003, the fraction of workers whose earnings fell by at least 
50 percent from the previous year, the fraction whose earnings fell by 
at least 25 percent, the fraction whose earnings increased by at least 
25 percent, and the fraction whose earnings increased by at least 50 
percent.\3\ Because the extent to which earnings vary from year to year 
within those categories is also important, CBO calculated the standard 
deviation of the one-year change in earnings. The standard deviation 
can be used to construct an interval (from the average percentage 
change minus the standard deviation value to the average percentage 
change plus the standard deviation value) within which roughly 80 
percent of workers fall.\4\ CBO also calculated two additional measures 
of variability: the fraction of workers in each year who had no 
earnings at all in the previous calendar year, and the fraction of 
workers in each year who had no earnings in the subsequent calendar 
year.
---------------------------------------------------------------------------
    \2\ Most existing studies adjust for workers' ages. CBO's analysis 
does not; that is, a portion of the trends in variability may be the 
result of the aging of the workforce. An analysis that does account for 
age is presented in the appendix to this report.
    \3\ Individuals with no earnings in both years of a two-year 
pairing are excluded from the analysis. Workers with no earnings in the 
first year and positive earnings in the second year of a two-year 
pairing are coded as having a 100 percent increase in earnings; the 
percentage increase in earnings for those workers would otherwise not 
be defined. The analysis of the trends in earnings volatility is not 
sensitive to that choice. See the appendix for a discussion of how 
CBO's analysis is related to that used in other studies.
    \4\ CBO calculated this statistic on the basis of the empirical 
distribution of the one-year percentage change in total wage earnings 
in the CWHS.
---------------------------------------------------------------------------
    In its analysis of survey data from the 2001 panel of the SIPP, CBO 
focused on the annual earnings of workers between the ages of 22 and 59 
in 2001 and 2002. The 2001 panel of the SIPP is the latest available 
from which the annual percentage change in workers' earnings can be 
calculated. Because the survey collects demographic information on 
workers, CBO's analysis was able to determine how the changes in 
earnings varied with the workers' education level and age. Finally, CBO 
used information on the reasons for which individuals were not working 
to help provide insight into the causes of large declines in earnings.
           analysis of variability using administrative data
    Individual earnings tend to rise over a worker's lifetime.\5\ From 
year to year, however, there is substantial variability in those 
earnings, according to data from the CWHS. For example, between 2002 
and 2003, one-in-five workers saw his or her real (inflation-adjusted) 
earnings increase by at least 25 percent, and roughly the same share of 
workers saw his or her earnings decline by at least 25 percent. A 
substantial portion of workers, about one-in-seven, saw their earnings 
decline by at least half.
---------------------------------------------------------------------------
    \5\ For a discussion of trends in hourly wages, hourly wage 
dispersion, and earnings dispersion, see Congressional Budget Office, 
Changes in Low-Wage Labor Markets Between 1979 and 2005 (December 
2006); and Jonathan A. Schwabish, Earnings Inequality and High Earners: 
Changes During and After the Stock Market Boom of the 1990s, 
Congressional Budget Office Working Paper 2006-06 (April 2006).
---------------------------------------------------------------------------
    Relatively little research to date has explored whether earnings 
variability has risen over the past 20 years. Resolving questions about 
those trends is important not only to inform policymakers, but also to 
allow CBO to construct more accurate long-term projections of earnings 
for its analyses of the Social Security and Medicare programs.
    To examine trends in earnings variability, CBO used administrative 
data from its long-term Social Security model. Administrative data have 
advantages over survey data because the administrative records yield 
very large samples of workers, allowing for more precise statistical 
analyses. Furthermore, administrative data more accurately measure 
year-to-year variability in earnings, because individuals' responses to 
surveys--which rely on the respondents' recall--are often in error. 
Such error could lead researchers to either overstate or understate 
workers' actual changes in earnings.\6\
---------------------------------------------------------------------------
    \6\ See John Bound and Alan Krueger, ``The Extent of Measurement 
Error in Longitudinal Surveys: Do Two Wrongs Make a Right?'' Journal of 
Labor Economics, vol. 9, no. 1 (January 1991), pp. 1-24; and Julian 
Cristia and Jonathan A. Schwabish, Measurement Error in the SIPP: 
Evidence from Matched Administrative Records, Congressional Budget 
Office Working Paper 2007-03 (January 2007).
---------------------------------------------------------------------------
    Analyses using administrative data are also limited in a number of 
ways, however; the primary limitation is that, beyond the age and sex 
of the worker, little or no demographic information is available. 
Moreover, the administrative data only reflect workers' earnings: No 
information on workers' family income or assets is available. 
Therefore, the analyses cannot examine how changes in a worker's 
earnings might be offset by changes in other sources of family income 
or by the existence of financial assets. Furthermore, the analyses do 
not account for the impact of income or payroll taxes. The tax system 
can help to smooth fluctuations in income--sometimes quite 
significantly--so workers' after-tax income can vary less from year to 
year than their pretax income does.
    CBO's analysis of the CWHS administrative data indicates that, 
since 1980, the trend in year-to-year earnings variability has been 
roughly flat. That finding is consistent with the results of existing 
studies, which tend to show more variability in earnings in the 1980s 
and 1990s (on a percentage basis) than in the 1970s but relatively 
stable trends in earnings variability since about 1980.\7\
---------------------------------------------------------------------------
    \7\ See, for example, Peter Gottschalk and Robert Moffitt, ``The 
Growth of Earnings Instability in the U.S. Labor Market,'' Brookings 
Papers on Economic Activity, no. 2 (1994); Steven Haider, ``Earnings 
Instability and Earnings Inequality of Males in the United States: 
1967-1991,'' Journal of Labor Economics, vol. 19, no. 4 (2001); Maury 
Gittleman and Mary Joyce, ``Earnings Mobility in the United States, 
1967-91,'' Monthly Labor Review, vol. 118, no. 9 (September 1995), pp. 
3-13; Robert Moffitt and Peter Gottschalk, ``Trends in the Transitory 
Variance of Earnings in the United States,'' Economic Journal, vol. 
112, no. 478 (2002), pp. 68-73.
    Gottschalk and Moffitt (1994) examine earnings variability through 
1984. Haider (1991) and Gittleman and Joyce (1995) examine earnings 
variability through 1991. Finally, Moffitt and Gottschalk (2002) 
examine earnings variability through 1996. Each study finds relatively 
stable trends in comparable measures of variability after 1980.
---------------------------------------------------------------------------
    Although the trend in earnings variability has been roughly flat 
since 1980, it does appear to vary with the business cycle; large 
declines in total wage earnings were more frequent in years in which 
the growth rate of gross domestic product (GDP) was relatively low. 
Between 1980 and 1981, for example, when the U.S. economy was in a 
recession and GDP growth was slowing, nearly one-in-five workers 
experienced a 50 percent drop in earnings, and nearly one-in-four 
experienced a 25 percent drop in earnings, adjusted for inflation (see 
Figure 1 on page 9 and Figure 2 on page 10). By 1983, when the economy 
had recovered somewhat, only one-in-five workers experienced a decline 
in earnings of at least 25 percent from one year to the next and only 
15 percent experienced declines of at least 50 percent. Since 2000, 
earnings variability has increased slightly: By 2003, almost one-in-
five workers experienced at least a 25 percent drop in earnings and 
one-in-seven workers experienced a 50 percent drop.
    The percentage of workers who experienced at least a 50 percent 
increase in earnings from one year to the next declined somewhat 
between 1981 and 2003--from about 23 percent to 16 percent--and the 
percentage of workers who experienced at least a 25 percent rise in 
earnings declined slightly, falling from 27 percent to 22 percent (see 
Figure 3 on page 11 and Figure 4 on page 12). Between 1980 and 2003, 
women were more likely to have experienced large changes in earnings 
than men were, although the difference between the two sexes narrowed 
over that period. That narrowing occurred during a period in which the 
participation rate of women in the labor force increased substantially.
    The measures of earnings variability displayed in Figures 1 through 
4 rely on changes in earnings that are greater or less than 
prespecified amounts. An alternative measure, which incorporates 
changes of any size, is the standard deviation of the one-year change 
in inflation-adjusted earnings. Unlike the other measures, which 
generally show stable levels of variability since 1980, the measure of 
variability based on the standard deviation has declined somewhat over 
the 1981-2003 period (see Figure 5 on page 13).
    CBO's analysis of earnings includes the variability that stems from 
transitions between years in which workers had no earnings and years in 
which they had positive earnings. Both the percentage of workers in 
each year who did not have any earnings in the previous calendar year 
and the percentage of workers who did not have any earnings in the 
subsequent calendar year have declined over the 1980-2003 period (see 
Figure 6 on page 14). In 1981, for example, 11 percent of workers had 
no earnings in the previous year (1980) and 12 percent had no earnings 
in the subsequent year (1982). In 2002, by contrast, 5 percent of 
workers had no earnings in the previous year (2001) and about 6 percent 
had no earnings in the subsequent year (2003).
    There was no increase in the level of earnings variability in 
selected years between 1980 and 2003 for workers of different ages or 
in the overall population. In general, younger workers (those ages 22 
to 29) tend to experience more variability in earnings than do older 
workers (see Table 1 on page 7). Because older workers have more stable 
earnings than do younger workers, earnings variability among all 
workers should decline somewhat as the workforce ages. Indeed, the 
declines in variability observed in Figures 3 through 6, in part, are 
the result of that aging.\8\
---------------------------------------------------------------------------
    \8\ See the appendix for a discussion of an analysis that more 
closely follows that of Gottschalk and Moffitt (1994). In particular, 
that analysis controls for workers' ages and excludes workers who 
transition between years of no annual earnings and years with positive 
earnings.
---------------------------------------------------------------------------
    In addition to analyzing the trends since 1980 in workers' total 
wage earnings, CBO analyzed the trend in variability since 1960 in the 
earnings on which workers paid Social Security taxes. That measure of 
earnings is more limited than the measure of total wage earnings, 
because if a worker's earnings exceed the Social Security maximum 
taxable income, only that maximum value is reported. That maximum was 
relatively low in the 1960s, so the analysis examines the fraction of 
workers in the bottom two quintiles (or fifths) of the earnings 
distribution who experienced large declines--of 25 percent or 50 
percent--in their Social Security taxable earnings. The changes in the 
maximum taxable income would not be expected to affect those workers 
because the maximum is above the 40th percentile of annual earnings 
throughout the 1960-2003 period.
    Between the early 1960s and the early 1980s, the fraction of male 
workers in the bottom two quintiles of the earnings distribution who 
experienced at least a 50 percent decline in their Social Security 
taxable earnings over the previous year increased--from roughly one-in-
six workers in 1961 to one-in-four workers in 1982 (see Figure 7 on 
page 15). Between 1982 and 2003, by contrast, there was little change 
in earnings variability for male workers (although it did vary with the 
business cycle, increasing slightly during the 1991 and 2001 
recessions).
    The pattern differs significantly for female workers. Between the 
early 1960s and the mid 1980s, the percentage of female workers who 
experienced 50 percent or greater declines in earnings fell from 30 
percent to less than 25 percent. Since 1984, earnings variability among 
female workers has been roughly constant. For all workers in the bottom 
two quintiles of the earnings distribution, there has been little 
change in this measure of earnings variability over the entire 1960-
2003 period.
    For workers in the bottom two quintiles whose Social Security 
taxable earnings fell by at least 25 percent from one year to the next 
between 1961 and 2003, the trends are similar to those displayed in 
Figure 7. The overall trend in earnings variability between 1960 and 
2003 for all workers has been roughly flat (see Figure 8 on page 16). 
The results for male workers are consistent with most existing studies 
that find less earnings variability in the late 1960s and 1970s than in 
the 1980s and early 1990s. They do suggest, however, that there may 
have been a decline in earnings variability among women that offset the 
increase among men.
               analysis of variability using survey data
    To determine how changes in earnings varied by workers' 
characteristics and to examine potential reasons for large changes in 
workers' earnings, CBO analyzed recent data from the Survey of Income 
and Program Participation. The analysis focused on workers ages 22 to 
59. As with the analysis based on administrative data, this analysis 
showed substantial variation in workers' earnings from 2001 to 2002. 
Over that one-year period, one-in-four workers saw his or her earnings 
increase by at least 25 percent after inflation, while one-in-five saw 
his or her earnings decline by at least 25 percent. A substantial 
portion of workers, 11 percent, saw their earnings decline by at least 
half (see Figure 9 on page 17).
    Workers with less education tend to experience more volatility in 
their earnings than do workers with more education (see Table 2 on page 
8). For example, from 2001 to 2002, 16 percent of workers without a 
high school education had their earnings decline by 50 percent or more, 
compared with 10 percent of workers with more than a high school 
education.
    Such fluctuations in earnings can result from many sources, 
including job changes, losses, or gains; voluntary exits from the labor 
force, perhaps to care for children or other family members; changes in 
the number of hours worked per year; or changes in the wage rate 
received by workers. Most workers who experienced at least a 50 percent 
drop in earnings between 2001 and 2002 were not working for at least 
one month and typically did not work for nine months in 2002. When 
those survey respondents were asked why they were not working, the most 
common answers were that they were caring for a child or other family 
member or were pregnant; were not able to find work or had been laid 
off; were unable to work because of disability, illness, or injury; or 
were not interested in working or were retired.\9\ The responses appear 
to be split evenly between workers suggesting that their departure from 
the labor force was voluntary and those suggesting that it was not.
---------------------------------------------------------------------------
    \9\ Only those survey respondents who had at least four consecutive 
months without a job were asked this question.
---------------------------------------------------------------------------
    For another point of comparison, CBO conducted its analysis using 
data from 1997 to 1998--a period of relatively rapid economic growth, 
in contrast to the relatively slow growth from 2001 to 2002--and found 
similar results.\10\
---------------------------------------------------------------------------
    \10\ The data are from the 1996 and 2001 panels of the SIPP, the 
latest panels available for which the annual percentage change in 
workers' earnings can be calculated.
---------------------------------------------------------------------------
                               conclusion
    CBO's analysis finds that a significant number of workers 
experience substantial variability in their total wage earnings from 
year to year. An examination of trends over the past 20 years shows 
little change in such earnings variability for both men and women. The 
reduction in macroeconomic volatility over the past several decades 
does not appear to have translated into lower levels of variability in 
workers' earnings. CBO will be examining trends in family income 
variability in its future work.


Table 1.--Percentage of Workers for Whom Total Wage Earnings Dropped or Rose by 50 Percent or 25 Percent, by 10-
                                                Year Age Category
                                                    (Percent)
----------------------------------------------------------------------------------------------------------------
                                                                              Total Wage Earnings
                                                             ---------------------------------------------------
                                                               50 Percent   25 Percent   25 Percent   50 Percent
                                                                  Drop         Drop         Rise         Rise
----------------------------------------------------------------------------------------------------------------
Ages 20 to 29
1983........................................................         17.5         23.2         36.0         29.6
1993........................................................         16.0         22.4         33.2         25.6
2003........................................................         16.4         23.7         32.6         24.8
Ages 30 to 39
1983........................................................         15.1         19.9         29.5         24.4
1993........................................................         14.1         19.4         23.0         17.5
2003........................................................         13.8         19.9         22.2         16.2
Ages 40 to 49
1983........................................................         13.7         18.1         25.4         20.9
1993........................................................         12.0         16.8         18.5         14.0
2003........................................................         11.9         17.1         17.8         12.8
Ages 50 to 59
1983........................................................         15.1         19.7         21.7         18.1
1993........................................................         14.6         19.7         15.7         12.0
2003........................................................         13.1         18.6         14.2         10.3
All Workers Ages 22 to 59
1983........................................................         15.5         20.5         29.4         24.2
1993........................................................         14.1         19.5         23.1         17.7
2003........................................................         13.6         19.5         21.3         15.7
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the Social Security Administration's Continuous Work
  History Sample.
Note: Total wage earnings include wages and salaries, tips, and other forms of compensation; they exclude self-
  employment earnings and deferred compensation. Workers without any earnings in the previous calendar year are
  included, and their percentage change in earnings is coded as 100.


 Table 2.--Distribution of Changes in Workers' Annual Real Earnings, by Educational Attainment and Age, 2001 to
                                                      2002
                                                    (Percent)
----------------------------------------------------------------------------------------------------------------
                                                  Decrease in Earnings of   Changes in   Increase in Earnings of
                                                         At Least          Earnings of          At Least
                                                --------------------------  Less Than  -------------------------
                                                  50 Percent   25 Percent   25 Percent   25 Percent   50 Percent
----------------------------------------------------------------------------------------------------------------
All Workers Ages 22 to 59......................         11.3         20.2         52.2         27.6         17.4
Educational Attainment
  Less than high school........................         15.9         25.9         43.8         30.3         21.5
  High school..................................         12.4         20.8         51.7         27.6         17.5
  More than high school........................         10.1         19.0         53.7         27.2         16.8
Age
  22 to 30.....................................         12.8         21.4         45.3         33.3         22.1
  31 to 40.....................................         11.0         19.7         52.7         27.6         17.1
  41 to 59.....................................         10.9         19.9         54.9         25.2         15.6
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the 2001 panel of the Bureau of the Census's Survey of
  Income and Program Participation.

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                                 ______
                                 
                               Appendix:

              Alternative Measures of Earnings Variability

    The results presented in the main text are based on the methodology 
used by Peter Gottschalk and Robert Moffitt in their paper titled ``The 
Growth of Earnings Instability in the U.S. Labor Market,'' which was 
published in the Brookings Papers on Economic Activity series in 1994 
(no. 2, pp. 217-272).
    The Congressional Budget Office's (CBO's) primary analysis uses 
administrative data from the Continuous Work History Sample (CWHS). 
Those data are provided by the Social Security Administration to CBO so 
that CBO may closely examine patterns in earnings over time and 
continue to improve the accuracy of its long-term models of the Social 
Security and Medicare programs.
    The use of the CWHS involves trade-offs.\1\ On the one hand, 
administrative data are well-suited to an examination of year-to-year 
variability in earnings, as the data are not subject to the same 
measurement error as are survey data, which rely on the survey 
respondent's recall. The presence of that measurement error may cause 
one to overstate or understate the actual change in earnings from year 
to year.\2\ Furthermore, the CWHS data contain a large number of 
observations, allowing for relatively precise statistical analyses. On 
the other hand, the CWHS is limited in scope in that it only contains 
reliable data on an individual's earnings, birth year, and sex. There 
is no additional information on the individual, such as education, nor 
is there any information on the individual's family members. Using 
those data alone, one cannot examine the circumstances under which a 
change in earnings occurred--whether it is the result of a job change, 
job loss, job gain, or changes in hours worked or wages paid at the 
same job. Nor can one examine whether a change in earnings was 
mitigated or exacerbated by changes in the earnings of other family 
members. In addition, there is no information on other sources of 
income or assets, both of which could serve as important buffers 
against the consequences of changes in earnings (especially a decline 
in earnings).
---------------------------------------------------------------------------
    \1\ For a comparison of CWHS data to survey data from the Current 
Population Survey, see Jonathan A. Schwabish, Earnings Inequality and 
High Earners: Changes During and After the Stock Market Boom of the 
1990s, Congressional Budget Office Working Paper 2006-06 (April 2006).
    \2\ See John Bound and Alan Krueger, ``The Extent of Measurement 
Error in Longitudinal Surveys: Do Two Wrongs Make a Right?'' Journal of 
Labor Economics, vol. 9, no. 1 (January 1991), pp. 1-24; and Julian 
Cristia and Jonathan A. Schwabish, Measurement Error in the SIPP: 
Evidence from Matched Administrative Records, Congressional Budget 
Office Working Paper 2007-03 (January 2007).
---------------------------------------------------------------------------
    Earnings in the CWHS are total wage earnings; they include wages 
and salaries, tips, and other forms of compensation and are not subject 
to top-coding. Self-employment earnings and deferred compensation are 
excluded. The earnings are pretax; the mitigating effect of the tax 
system on the consequences of changes in earnings cannot be captured 
here. Finally, earnings are inflation-adjusted, using the research 
series for the consumer price index for all urban consumers.
    The sample consists of males and females ages 22 to 59, which 
results in the (intentional) exclusion of many transitions--from school 
to work, for example, or from work to retirement--from the analysis.
    The results presented in Figures 1 through 5 in the main analysis 
are based on one measure of earnings variability: the inflation-
adjusted percentage change in a person's earnings between a given year 
(et) and the previous year (et - 1), 
calculated as
[GRAPHIC] [TIFF OMITTED] 34852.023

    That measure is undefined for individuals with earnings of zero in 
both years; those individuals are excluded from the analysis. The 
treatment of workers with positive earnings in one year and zero 
earnings in the other is asymmetric, as those individuals who 
transition from positive to zero earnings have a calculated change in 
earnings of -100 percent. For workers who transition from zero to 
positive earnings, the percentage change in earnings is undefined. To 
capture those transitions symmetrically in Figures 1 through 5, CBO 
assigned those workers moving from zero to positive earnings a 
percentage change in earnings of +100 percent.
    Gottschalk and Moffitt (1994) measure the percentage change in 
earnings somewhat differently. Instead of comparing earnings in a given 
year with earnings in the previous year, they compare earnings in a 
given year with a five-year moving average of earnings around that 
year. To determine whether the results presented in its main analysis 
are sensitive to such a distinction, CBO examined the percentage change 
in a worker's earnings between a given year (et) and the 
average earnings of that worker over a five-year period 
(et - 4 to et), calculated as
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    The measure is undefined for individuals with no earnings in all 
five years; those individuals are excluded from the analysis.
    The results presented in the main analysis are robust to that 
slight change in methodology. The fraction of workers experiencing a 50 
percent or 25 percent decline in their earnings remains relatively 
stable over time (see Figure A-1 on page 23 and Figure A-2 on page 24), 
while the fraction of workers experiencing a 50 percent or 25 percent 
increase in their earnings trends slightly downward over time (see 
Figure A-3 on page 25 and Figure A-4 on page 26). That downward trend 
in the measure of variability remains, even when CBO examined the 
standard deviation of the percentage change (which captures the entire 
distribution of changes) rather than focusing on single points in the 
distribution of changes (see Figure A-5 on page 27).
    Another difference between the methodology used in this analysis 
and that used by Gottschalk and Moffitt (1994) and in many other 
studies is that those studies examine variability in the natural 
logarithm of earnings and also control for the age of the worker. Using 
the natural logarithm of earnings in place of the level of earnings 
eliminates workers with any years of zero earnings; thus, changes in 
earnings between years of zero earnings and years with positive 
earnings would not be included in this measure of variability. As shown 
in Figure 6 of the main analysis, roughly 6 percent of workers in the 
latter part of the period had no earnings in either the prior or 
subsequent year.
    To determine whether the results in the main analysis are sensitive 
to those differences in specification, CBO first conducted its analysis 
using the natural logarithm of earnings and, second, estimated a fixed-
effects model in which the natural logarithm of earnings for all 
individuals in all years is regressed on a quartic in age. The 
residuals (et) from that regression were calculated for each 
individual. For a given individual, the five-year moving average of 
those residuals was used as the basis of the percentage difference, 
calculated as
[GRAPHIC] [TIFF OMITTED] 34852.025

    The findings using the natural logarithm of earnings are presented 
in Figures A-6 through A-10. Comparing those results with the results 
in the main analysis, the trends over time in the fraction of workers 
experiencing a 50 percent or 25 percent decline in earnings remains 
relatively stable (see Figure A-6 on page 28 and Figure A-7 on page 
29). Eliminating transitions between years of zero earnings and years 
of positive earnings eliminates any downward trend in the fraction of 
workers experiencing a 50 percent or 25 percent increase in earnings 
over time (see Figure A-8 on page 30 and Figure A-9 on page 31). And, 
finally, examining the standard deviation (and thus capturing the full 
distribution of changes over time), a small portion of the downward 
trend seen in Figure 5 is eliminated (see Figure A-10 on page 32).
    Adopting the natural log specification and controlling for workers' 
age results in even flatter trends over time than were observed in the 
previous two specifications (see Figures A-11 through A-15). The 
consistent flattening of the trends in earnings variability after 
controlling for age suggests that a portion of the decline in the 
variability in earnings seen in Figures 1 through 5 in the main 
analysis is probably because of the aging of the population. As the 
population of workers ages, older workers, who tend to have less-
variable earnings, make up a larger fraction of the overall population. 
As a result, workers overall have less-variable earnings.
    The results presented in this report are consistent with those of 
Gottschalk and Moffitt (1994) for the early 1980s (the only years for 
which the two analyses overlap). Both show relatively stable levels of 
earnings variability during that period. The results presented in 
Figure A-10 are consistent with the findings of other studies that use 
more-formal statistical models of earnings dynamics. Those studies 
include later work by Moffitt and Gottschalk (``Trends in the 
Transitory Variance of Earnings in the United States,'' published in 
The Economic Journal in 2002) as well as work by Steven Haider 
(``Earnings Instability and Earnings Inequality of Males in the United 
States: 1967-1991,'' published in the Journal of Labor Economics in 
2001). Haider examined earnings variability through 1991, and Moffitt 
and Gottschalk captured variability in earnings through 1996.
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                               __________
 Prepared Statement of Dr. Lael Brainard, Vice President and Director, 
       Global Economy and Development, The Brookings Institution
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to testify before your committee. Your focus on income 
fluctuations is all too real for many American middle class families 
today and is likely to be a reality for many more in coming years. It 
is worth spending a minute on some of the likely economic drivers 
before turning to one of the promising policy responses.
                      a new wave of globalization
    A new wave of globalization has reached our shores. Although the 
individual elements feel familiar, the combined contours are 
unprecedented--in scope, speed and scale.
    Because China is successfully pursuing at a scale never seen before 
a growth strategy that is export-led and foreign direct investment fed, 
its rise is sending waves to the farthest reaches of the global 
economy. China is already deeply embedded in global manufacturing 
supply chains, confronting higher wage producers with the difficult 
choice of moving up the value chain or lowering costs.
    India's concurrent economic emergence has complicated the 
challenge. While India is pursuing a growth strategy more reliant on 
domestic consumption and investment than China, nonetheless its success 
in exporting higher skilled ``knowledge'' services such as software 
programming has expanded the scope of globalization. Many Americans in 
white collar occupations are confronting the reality of low wage 
foreign competition for the first time.
    The current episode of global integration dwarfs previous 
expansions: the entry of India and China into the global labor force 
amounts to an expansion of roughly 70 percent--concentrated at the 
lower end of the wage scale. Textbook economics would predict a squeeze 
on wage earners until capital and technology investments adjust. 
Indeed, the data suggests inequality is once again on the rise in many 
of the world's richer economies.
    In the United States, profits are capturing a larger share of 
income and wages a lower share than at any time in the last 50 years. 
Moreover, economists David Autor, Larry Katz, and Melissa Kearney have 
pointed out that the gap between the middle and top of the U.S. wage 
distribution (between the 90th and 50th percentile) appears to be 
widening today, in contrast to earlier decades, where the focus was on 
the gap between the bottom and middle (between the 50th and 10th 
percentiles).
                           a weak safety net
    In the face of accelerated job losses in manufacturing and white-
collar offshoring in services, an ever-broader pool of American workers 
is finding that the nation's safety net has more holes than netting.
    Despite the fact that the U.S. labor market ranks second to none 
when it comes to job turnover, the nation's safety net for easing job 
transitions remains one of the weakest among the wealthy economies. Not 
only do U.S. unemployment benefits have a short duration, but America's 
heavy reliance on an employer-based system of insurance means that 
displaced workers face the prospect of losing health and pension 
benefits along with income. For permanently displaced workers, average 
earnings in the new job are 16 percent lower than earnings in their 
previous job, while displaced manufacturing workers generally face a 20 
percent drop in earnings. The consequences of job loss are particularly 
damaging in import-competing industries, where displaced workers face 
longer spells of unemployment and greater permanent wage declines than 
do workers in other industries.
    America's safety net is miserly in comparison with those of almost 
every other advanced economy. The main federally mandated unemployment 
insurance (UI) program contains so many restrictions that today only 
about 40 percent of all jobless workers receive benefits.
    The last serious overhaul of the nation's employment safety net was 
in 1962, when President John F. Kennedy established the TAA program to 
compensate workers who suffer job loss as a result of trade 
liberalization. But workers have long found it difficult, time-
consuming, and expensive to prove that they are entitled to extended 
unemployment benefits under the nation's Trade Adjustment Assistance 
(TAA) program.
    In 2002 Congress overhauled and expanded TAA, adding a health care 
tax credit, doubling the training budget, and substantially raising 
budget outlays for income support. But the TAA program continues to 
disappoint. Participation has remained surprisingly low, thanks in part 
to confusing Department of Labor interpretations and practices that 
ultimately deny benefits to roughly three-quarters of workers who are 
certified as eligible for them. TAA has helped fewer than 75,000 new 
workers per year, while denying more than 40 percent of all employers' 
petitions. And remarkably, the Department of Labor has interpreted the 
TAA statute as excluding the growing number of services workers 
displaced by trade.
    Despite its laudable goals, the TAA program has repeatedly failed 
to meet expectations. Between 2001 and 2004, an average of only 64 
percent of participants found jobs while they participated in TAA. And 
earnings on the new job were more than 20 percent below those prior to 
displacement.
                      the case for wage insurance
    With workers more likely to face permanent displacement and 
experiencing average income declines of 16 percent when they are 
reemployed following displacement, the time has come for the Federal 
Government to augment existing programs by adopting a new insurance 
program that insures against wage loss, not just unemployment, for 
permanently displaced workers.\1\ Wage insurance would smooth income 
fluctuations while encouraging displaced workers to broaden their 
employment search. It also defrays the cost to employers of hiring and 
providing on-the-job training to new employees from different sectors. 
On aggregate, wage insurance could lead to shorter spells of 
displacement and more efficient reskilling for workers.
---------------------------------------------------------------------------
    \1\ Jeffrey Kling, Lori Kletzer, Robert Litan, and Howard Rosen 
have put forth a variety of proposals for wage insurance.
---------------------------------------------------------------------------
    A chief goal of wage insurance is to smooth the incomes of workers 
who suffer permanent displacement and declines in their earnings. Wage 
insurance is most likely to have overall positive economic benefits if 
it targets workers whose earnings would otherwise fall dramatically as 
forces outside their control devalue their skills. By replacing some of 
the lost earnings, wage insurance encourages more rapid reemployment; a 
Canadian pilot wage insurance program reduced unemployment durations by 
4.4 percent on average.
    Wage insurance can act as a subsidy of on-the-job training for the 
worker's new employer. Generalized retraining programs not only fail to 
guarantee a worker a job but also cost the worker the wages that he or 
she could earn by accepting new employment sooner. The retraining that 
a displaced worker receives on a new job provides new skills that 
contribute directly to his or her performance in the new job and is 
thus directly useful not only to the worker but also to the new 
employer.
    Finally, evidence suggests that wage insurance encourages workers 
to consider different types of jobs and sectors of employment and, 
therefore, broadens the job search. This is particularly important for 
displaced workers whose firm-specific skills have declined in value.
    Most programs designed to ease job transitions entail a tradeoff 
between the degree of eligibility targeting and participation rates. 
While targeted programs should be more cost-effective in principle, 
targeting requires burdensome eligibility and compliance requirements 
that sharply lower participation rates and sometimes introduce stigma. 
The TAA experience argues strongly for a less targeted program 
implemented through an existing system with proven efficacy, such as 
the UI system or though the tax system as a refundable tax credit.
    Moreover, if the goal is to provide some degree of insurance 
against extreme income fluctuations, wage loss insurance should be 
available to all permanently displaced workers, who have at least 2 
years of tenure at the previous job. It might also make sense to 
restrict the program to workers displaced from full-time jobs and 
reemployed full-time, so as to avoid any possible incentive to reduce 
hours of work. Further, the compensation period would be limited to 
some initial period, perhaps 2 years, long enough to help strengthen 
the new employment relationship during the period when on-the-job-
training is arguably most concentrated.
    The wage loss replacement rate, the duration of benefits, and the 
annual cap on compensation determine the kinds of workers who would 
benefit most from the program. A high replacement rate combined with a 
low annual compensation cap would provide the greatest cushion to 
lower-income workers suffering steep losses in earnings, while a lower 
replacement rate combined with a high annual cap would tilt 
compensation toward higher income earners.
    According to our estimates, a wage insurance program that replaces 
50 percent of earnings losses for long tenure full-time displaced 
workers up to a maximum of $10,000 per year for up to 2 years would 
cost roughly $3.5 billion per year, using a conservative estimate of 
offsetting savings in other unemployment and training programs. On a 
per worker basis, this cost falls midway between the current 
unemployment and retraining benefits available under UI and Worker 
Investment Act (WIA) programs and the comprehensive cost of TAA 
benefits.
    Under such a program, an average trade-displaced worker, who earned 
$37,382 in 2004 and was reemployed with a 26 percent loss rate at 
$27,662 would instead receive $33,522 for the first 2 years after 
reemployment, thus enabling them to smooth their income while becoming 
more valuable in the new job.
    Of course, the costs can be substantially reduced by offering more 
modest benefits. For a high-unemployment year such as 2003, costs could 
range from a low of $1.6 billion for a 1-year program with a 30 percent 
replacement rate and a $10,000 cap to a high of $7 billion for a 2-year 
program with a 70 percent replacement rate and a $20,000 annual cap.
    How do we think about the price tag? For a relatively robust 
program, the net cost of $3.5 billion per year amounts to an insurance 
premium of roughly $25 per worker per year. One simple way to finance 
the uncovered costs of wage insurance would be through a modest 
increase in the current Federal unemployment tax (FUTA) with the 
incidence split between employers and employees.
    Wage insurance could provide an important tool in a broader set of 
policies designed to help American middle class families insure against 
disruptive income fluctuations, while preserving the benefits of a 
dynamic economy. For the price of $25 per worker per year, the Nation 
reaps economic benefits in the form of less income volatility and more 
rapid reemployment. Wage insurance could be an important policy tool to 
help make work pay following displacement; the intention is to augment 
the insurance available to middle class Americans facing the 
possibility of greater income volatility, to augment the programs 
current available--not to replace them.
   Prepared Statement of Maurice Emsellem, Policy Director, National 
                         Employment Law Project
    Chairman and members of the Committee, thank you for this 
opportunity to testify today on the critical subject of economic 
insecurity in the United States and offer our perspective on proposals 
to create a new program of wage insurance and other options for Federal 
reforms.
    My name is Maurice Emsellem, and I am the Policy Director for the 
National Employment Law Project (NELP), a non-profit research and 
advocacy organization that specializes in economic security programs, 
including unemployment insurance, Trade Adjustment Assistance (TAA) and 
the workforce development system. Our organization has worked in the 
states and with Congress to protect the nation's economic security 
programs against serious attacks in recent years and successfully 
promote reforms that deliver on the nation's promise of economic 
opportunity.
    We worked with Members of Congress to advocate for the extension of 
unemployment benefits during the last recession and for major 
improvements in the Federal program of benefits provided to the 
families left jobless by Hurricanes Katrina and Rita. We also have a 
special project working with state officials in the Midwest to help 
those workers laid-off from the auto industry to better access trade 
act benefits and other programs. Thus, we have a long-standing interest 
and commitment to policies that serve the interests of families hardest 
hit by economic downturns in the U.S. and the fallout from 
globalization.
    Today, we hope to call attention to some key unanswered questions 
about wage insurance given the interest in possible Federal 
legislation. Like the AFL-CIO and several unions that have expressed 
concerns with wage insurance,\1\ we believe that there are important 
questions that remain unanswered given the limited experience with the 
program. We are especially concerned that wage insurance will also 
promote more downward mobility, not good jobs, by subsidizing mostly 
low-wage employment. If adopted in the U.S., wage insurance could also 
undermine funding and support for existing economic security programs, 
including unemployment insurance and Trade Readjustment Assistance.
---------------------------------------------------------------------------
    \1\ Testimony of Bill Samuel, AFL-CIO Legislative Director, Hearing 
on Unemployment Compensation Aspects of U.S. Department of Labor Fiscal 
Year 2007 Budget: Hearing Before the House Ways & Means Committee, 
Subcommittee on Income Security and Family Support, 109 Cong. (2006).
---------------------------------------------------------------------------
    As described below, there are other immediate Federal priorities, 
including reform of the TAA program and an expansion of the 
unemployment insurance system, which could go a long way to promote 
economic opportunity and support the families hardest hit by long-term 
layoffs. In conclusion, we also highlight some of the most promising 
state innovations that could be incorporated into Federal law to 
protect working families against major economic hardship and help 
rebuild their communities.
                    a. key wage insurance questions
1. Does Wage Insurance Promote More Downward Mobility?
    By definition, wage insurance compensates workers who take lesser 
paying jobs, which are the same jobs that are less likely to pay 
benefits, like health insurance, that are critical to working families 
in today's unstable economy. Most economists who support wage insurance 
also argue that it creates an incentive for workers to be re-employed 
faster and thus reduces the period they collect their unemployment 
benefits.
    We are especially concerned that wage insurance promotes more 
downward economic mobility rather than new labor market policies that 
support quality jobs with benefits. In other words, wage insurance is 
not merely added income to help families get by during hard times. Nor 
is it like ``universal insurance'' promoted by Professor Jacob Hacker, 
which provides compensation to those who suffer major economic 
hardships. Instead, wage insurance is expressly contingent upon the 
worker accepting a lesser-paying job.
    If the goal is to support reform of low-road jobs that increasingly 
dominate the economy, then our reemployment strategies should do 
everything possible to promote good jobs. Federal policy can play a 
critical role but first Congress must not to endorse ``rapid 
reemployment'' proposals like wage insurance that encourage more low-
road employment, or at least fail to distinguish between good and bad 
employment outcomes.
2. Does the Available Research Make A Convincing Case for Wage 
        Insurance?
    Despite all the attention generated in support of wage insurance by 
economists and others, there has been remarkably limited scrutiny of 
the research on wage insurance. We believe the available evidence 
raises fundamental questions about the merits of wage insurance that 
should be more closely evaluated before pursuing Federal legislation.
    First, other than two pilot programs--one in Canada that produce 
limited results and another in the U.S. that is still pending--wage 
insurance is not a program that has existed on any large scale. Indeed, 
we question whether it is premature to create a new national program of 
wage insurance in the U.S. when the 2003 pilot, the Alternative Trade 
Adjustment Assistance (ATAA) program, has not yet issued its final 
findings. If it turns out that wage insurance is not working for the 
targeted group of trade impacted workers age 50 and over who are having 
the hardest time finding a new job at comparable pay, then why expand 
the program to those younger than 50 and to all dislocated workers as 
some have proposed?
    Second, what do we know about the impact of wage insurance on 
others who will be competing for the same lesser-paying jobs with those 
who are collecting wage insurance? According to a leading Upjohn 
Institute researcher who simulated the impact of a 2-year wage 
insurance program covering dislocated workers at half their prior pay, 
``virtually all the employment gains experienced by dislocated workers 
as a result of the wage subsidy come at the expense of other workers.'' 
\2\ Will this ``crowding out'' effect be even more severe in 
communities hardest hit by job losses, as in the Midwest, where large 
concentrations of dislocated workers are now competing with other 
workers for the same jobs?
---------------------------------------------------------------------------
    \2\ Davidson, Woodbury, ``Wage-Rate Subsidies for Dislocated 
Workers'' (Upjohn Institute Staff Working Paper 95-31, January 1995), 
at page 22.
---------------------------------------------------------------------------
    Third, if wage insurance encourages workers to take a job sooner, 
will they also end up taking lower paying jobs than they could have 
found if they kept looking for work with the help of their unemployment 
benefits? This gets at the critical tradeoff that laid-off workers 
constantly have to make, which is whether to take a lesser paying job 
or collect unemployment benefits and continue looking for a better job 
that will also increase their productivity. We know, for example, that 
workers who collect UI have an increased likelihood of finding a new 
job that will have employer-sponsored health insurance.\3\ In addition, 
at least one 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 UI benefits.\4\
---------------------------------------------------------------------------
    \3\ Boushey, Wenger, ``Finding the Better Fit: Receiving 
Unemployment Insurance Increases Likelihood of Re-Employment with 
Health Insurance'' (Economic Policy Institute: April 2005).
    \4\ Kiefer, Neumann, ``An Empirical Job Search Model with a Test 
Constant Reservation Wage Hypothesis,'' Journal of Political Economy, 
Vol. 87, No. 1, 89-107.
---------------------------------------------------------------------------
    Fourth, will workers who take lesser paying jobs with wage 
insurance benefit from any training that will improve their long-term 
productivity or would they be better off pursuing other forms of 
education and training? While some have argued that wage insurance 
leads to valuable training,\5\ we are not aware of any empirical 
evidence suggesting that workers who find jobs at half their prior pay 
are likely to receive substantial training that will significantly 
increase their earnings potential. In fact, wage insurance will often 
interfere with valuable education and training, including some 
community college programs that have produced major gains in income.\6\ 
Notably, the ATAA pilot program precludes the workers from collecting 
wage insurance while participating in training.
---------------------------------------------------------------------------
    \5\ Brainard, Litan, Warren, ``Insuring America's Workers in a New 
Era of Offshoring'' (Brookings Institution, Policy Brief #143, 2005), 
at page 3 (``Wage insurance also serves as a training subsidy for the 
worker's new employer. Generalized retraining programs not only fail to 
guarantee a worker a job but also cost the worker the wages that he or 
she could earn by accepting new employment sooner. The retraining that 
a displaced worker receives on a new job is the best kind: it provides 
new skills that contribute directly to his or her performance in the 
new job and is thus directly useful not only to the worker but also to 
the new employer.'')
    \6\ Trutko, Barnow, Farrell, Glosser, Final Report: Earnings 
Replacement Outcomes for Dislocated Workers: Extent of Variation and 
Factors Accounting for Variation in Earnings Replacement Outcomes 
Across State and Local Workforce Investment Boards (Capital Research 
Corporation: March 2005), at page A-8 (summarizing the results of 
various community college programs on dislocated worker post-
displacement earnings, including Pennsylvania where men earned $1,047 
more per quarter by attending community college and woman earned $812 
more.)
---------------------------------------------------------------------------
    Finally, what are the major lessons learned from the only empirical 
experience with wage insurance, the Canadian pilot program of the 
1990s? The Canadian program, called the Earnings Supplement Project, 
was evaluated by a leading research organization in a random assignment 
study (comparing a group that could collect wage insurance replacing up 
to 75 percent of their prior wages with a control group that could 
not). On nearly every measure they evaluated, focusing on the impact on 
employment and unemployment benefits, wage insurance fell far short of 
expectations. Thus, the Canadians did not continue the program.
    Of special significance to the U.S., the study found that of those 
assigned to the group who could collect wage insurance, only about 2 
out of 10 actually did so. When follow-up interviews were conducted to 
better understand this result, the researchers found that ``one of the 
most striking findings from the non-recipient groups was the limited 
perceived relevance of the supplement offer . . .'' \7\ Quoting one 
participant that typified the concerns they found, ``It [the 
supplement] was secondary. It was a not a priority. The priority was to 
get a job. I would like a good fit considering my background and my 
education so I wasn't willing to settle. It wasn't a money issue 
really.'' It may be that the low take-up rate in the ATAA program 
reflects a similar concern with wage insurance.
---------------------------------------------------------------------------
    \7\ Bloom, et al., Testing a Re-employment Incentive for Displaced 
Workers: The Earnings Supplement Project (Social Research & 
Demonstration Corporation: May 1999), at page 39.
---------------------------------------------------------------------------
    The results of the Canadian program also showed ``virtually no 
difference in the duration of [UI] benefits paid to recipients (22.1 
weeks for supplement group members versus 21.9 weeks for control group 
members).'' \8\ This finding conflicts with the claims of some 
researchers that wage insurance in the U.S. will produce savings based 
on reduced reliance on UI benefits. Late into the period when the 
workers started collecting UI, there was a modest impact on how many 
more workers found full-time work when they collected wage insurance. 
However, that impact was reduced in half when the study counted those 
in the control group who found part-time work (bringing the employment 
rate to 50.7 percent for those who could collect wage insurance 
compared to 48.4 percent for the control group).\9\
---------------------------------------------------------------------------
    \8\ Id. at page 53.
    \9\ Id.
---------------------------------------------------------------------------
3. Will Wage Insurance Undermine Existing Economic Security Programs?
    We are also concerned that a new national program of wage insurance 
for dislocated workers could undermine funding and support for 
necessary reforms of existing economic security programs, especially 
unemployment insurance and Trade Adjustment Assistance. At a time when 
economic security is a growing reality for working families from all 
walks of life, the existing economic security programs are struggling 
from limited resources and years of neglect and hostile oversight by 
the Bush Administration.
    Take the case of the unemployment insurance program. Today, only 36 
percent of unemployed workers collect jobless benefits due in large 
part to the major gaps in the program that leave out large numbers of 
low-wage, part-time and women workers. Meanwhile, Federal funding for 
administration of the program has declined compared to the increased 
demand for services, which has caused states to severely cut back on UI 
services. The states have also cut UI payroll taxes to record low 
levels, creating more pressure to deny benefits and take out loans from 
the Federal UI trust funds. Despite the new pressures on the Federal 
trust funds, Congress has also failed to increase the $7,000 tax base 
on Federal UI payroll taxes for nearly 25 years.
    The Trade Adjustment Assistance (TAA) program serving trade 
impacted workers has also been severely compromised, both by the Bush 
Administration's attacks on the program and by limited funding and 
program restrictions imposed by Congress. Despite the record trade 
deficit and major manufacturing layoffs, Congress has capped TAA 
training funds at just $220 million, thus providing training to fewer 
than 38,000 workers in 2005. As a result of the funding limits, 19 
states also suspended enrollment in training at some point between 
Fiscal Years 2001 and 2003.\10\ And this Fiscal Year, Michigan has 
already been forced to suspend enrollment in TAA training despite 
devastating layoffs in the auto industry.
---------------------------------------------------------------------------
    \10\ U.S. General Accountability Office, Reforms Accelerated 
Training Enrollment, But Implementation Challenges Remain (GAO-04-
1012), September 2004, at page 32.
    Insert GAO Report.
---------------------------------------------------------------------------
    Given these sobering realities, our concern is that the funding 
(estimated at $3.5 billion) and support for wage insurance will take 
precedence over long-overdue reforms of the TAA and UI programs. 
Whatever the ultimate source of revenue to pay for wage insurance, 
whether it is generated from increased Federal UI payroll taxes or new 
employer taxes (some have also suggested that employee taxes help pay 
for the program), it will effectively compete with funding for the UI 
program. And if the Canadian experience holds true in the United 
States, that wage insurance did not result in reductions in UI 
benefits, then the funding constraints will be even more severe.
    In addition to the funding threat, there is a potential substantive 
threat to existing economic security programs created by wage 
insurance. Specifically, wage insurance promotes the ``work first'' 
agenda of the Heritage Foundation and other groups that are working 
hard to dismantle the TAA program. According to the Heritage 
Foundation, ``If the aim of such programs is to help workers find new 
jobs, then the TAA should be eliminated over time and replaced by a 
program that provides incentives, not disincentives, for workers to do 
just that. Wage insurance is one such proposal that has won widespread 
support.'' \11\
---------------------------------------------------------------------------
    \11\ Denise Fronig, ``Trade Adjustment Assistance: A Flawed 
Program'' (The Heritage Foundation: July 31 2001).
---------------------------------------------------------------------------
                 b. federal economic security proposals
    These are tough times for many more working families, full of 
concern that they will not share in the promise of the American dream, 
or worse, that they will end up destitute despite a lifetime of hard 
work. What follows are several proposals for Federal policies that we 
believe will help create a reemployment system driven by the creation 
of quality jobs that will also restore confidence in the nation's 
workers that their government is there to support them and create new 
opportunities especially in times of special financial need.\12\
---------------------------------------------------------------------------
    \12\ For more detail on these and other Federal proposals, see 
Emsellem, ``Innovative State Reforms Shape New National Economic 
Security Plan for the 21st Century'' (National Employment Law Project: 
December 2006).
---------------------------------------------------------------------------
1. Honor the Promise of Economic Security to Trade-Impacted Workers
    The first priority of the 110th Congress should be to fulfill the 
promise of economic security to the nation's workers and their 
communities that have suffered major job losses due to Federal trade 
policies. Given the record trade deficits and the devastating loss of 
good-paying manufacturing jobs resulting from Federal trade policies, 
Congress should move boldly to create a more robust TAA program.
    Congress should start by establishing an entitlement to TAA 
training, thus removing the $220 million cap on funding that now 
deprives training to thousands of deserving workers who have been 
certified as TAA eligible. The entire TAA program is funded at $1 
billion a year, which compares with the $3.5 billion in funding being 
proposed to create a new wage insurance initiative. A serious new 
investment of funding in the TAA program could also pay for coverage of 
service workers, a new system of TAA certification that applies to 
whole industries and regions suffering dislocations due to trade, and 
other necessary reforms.
2. Modernize and Expand the Unemployment Insurance System
    Recognizing the changing nature of unemployment in today's economy, 
with far more long-term joblessness and increasing turnover of low-
paying service sector jobs, it is also time to modernize and expand the 
nation's unemployment insurance system.
    The 110th Congress should make Federal incentive funds available to 
the states to support innovative reforms that fill the gaps in the 
program that deny benefits to low-wage, part-time and woman workers. 
Federal funding should also target states that support training and 
education with the help of extended unemployment benefits and that 
increase the duration of unemployment benefits recognizing the new 
realities of long-term unemployment.
    In addition, the states should be more adequately compensated for 
the administration of their UI programs and Federal standards should be 
created to promote the solvency of state UI trust funds. Equally 
significant, the Federal system should be better prepared to provide 
far more adequate benefits in times of recession, major disasters like 
Hurricane Katrina and terrorist events like the September 11th attacks, 
which produce widespread devastation and threaten the nation's economy.
3. Model New Federal Policies on Innovative State Reforms
    Over the past decade, many states have been at the forefront of new 
economic security reforms that could help shape bold new Federal 
policies.
    Of special note, in response to the record rates of foreclosures, 
some states have created ``home protection funds'' providing revolving 
loans that save homes from foreclose and preserve the fabric of their 
communities. Others have created special training funds created from an 
offset of their UI payroll tax, often designed to make local and 
regional industries more globally competitive. One state has taken the 
lead in creating broad health care coverage for jobless families. And 
perhaps most significant, California has recently established the 
nation's first program of paid family and medical leave running along 
side the state unemployment insurance system.
    Congress can play a critical role supporting innovative state 
reforms by creating new financial incentives and providing pilot 
program funding to expand these and other initiatives. The more the 
states are successful in creating and sustaining such programs, the 
stronger the case that can be made in Congress that these innovative 
state reforms should make their way into Federal law and policy.
                               __________
 Prepared Statement of Lily L. Batchelder, Assistant Professor of Law 
                and Public Policy, NYU School of Law\1\
---------------------------------------------------------------------------
    \1\ The views expressed in this testimony are those of the author 
alone and do not necessarily represent those of NYU School of Law. 
Portions of this testimony draw upon joint work with Fred Goldberg and 
Peter Orszag. My co-authors also should not be held responsible for the 
views expressed in this testimony. I am grateful to David Kamin for 
excellent research assistance.
---------------------------------------------------------------------------
 household income volatility and tax policy: helping more and hurting 
                                  less
    Good morning, Mr. Chairman, Vice Chair Maloney, Ranking Member 
Saxton, and Members of the Committee. My name is Lily Batchelder and I 
am an assistant professor at NYU School of Law. Thank you for the 
opportunity to testify before you today on potential tax policy 
responses to household income instability. My testimony makes three 
main points:

     First, income volatility, especially when it involves income 
declines, imposes significant hardships on American families. It 
heightens stress about finances and may increase household living 
expenses. These hardships are most pronounced for middle- and low-
income families, whose incomes tend to be more volatile, and who tend 
to have less access to low-cost borrowing.
     Second, the income tax system currently simultaneously helps and 
hurts families trying to cope with these burdens. It helps in that it 
softens annual income fluctuations on an after-tax basis by timing tax 
payments so that a larger share of a family's income is due in taxes in 
its higher-income years, and smaller share in its lower-income years. 
It hurts because over time it imposes higher average tax rates on 
households with relatively volatile incomes than it does on others 
whose income is the same but more stable.
     Finally, I will discuss two potential reforms to make the tax 
system help more and hurt less when a family's income fluctuates. The 
first is a limited form of income averaging. It would permit taxpayers 
to elect to carryback unused standard deductions and personal and 
dependent exemptions for 1 year, and to average their income over 2 
years when calculating the Earned Income Tax Credit. The second is a 
much broader proposal, which would involve converting the roughly $500 
billion per year that we spend on tax incentives into uniform 
refundable tax credits. These reforms could be implemented on a 
revenue-neutral basis. Both would reduce the penalties that the tax 
system currently imposes on families with volatile incomes, and would 
provide relief from these penalties in the years when families need it 
most-when their income has fallen.
              i. background on household income volatility
    Household income volatility is pervasive. The evidence to date 
suggests that on average family income tends to vary by roughly 30 
percent from its mean.\2\ While further research is needed, there is 
also mounting evidence that household income volatility has been 
increasing over the past several decades as a percentage of household 
income.\3\ The source of this apparent rise in household income 
volatility is unclear. It likely results in part from increases in 
labor market flexibility and capital mobility that stem from legal 
changes and globalization. Both may have increased the variability of 
individual earnings. It also likely reflects the increasing presence of 
women in the paid labor force. As a result, couples now face a greater 
combined risk of job loss or wage declines, and no longer have a back-
up potential worker if the primary earner loses his or her job.\4\
---------------------------------------------------------------------------
    \2\ See, for example, Lily L. Batchelder, Taxing the Poor: Income 
Averaging Reconsidered, 40 Harvard Journal on Legislation 395, 446 
(2003); Jeffrey Liebman, Should Taxes Be Based on Lifetime Income: 
Vickrey Taxation Revised fig. 5 (July, 2002).
    \3\ See Jacob S. Hacker, The Great Risk Shift: The Assault on 
American Jobs, Families, Health Care, and Retirement and How You Can 
Fight Back 27, 203-04 n. 39 (2006); Peter G. Gosselin, The Poor Have 
More Things Today--Including Wild Income Swings, L.A. Times, Dec. 12, 
2004, at A1; Lily L. Batchelder, Taxing the Poor: Income Averaging 
Reconsidered, 40 Harvard Journal on Legislation 395, 446 (2003). There 
has been more research on earnings volatility, which appears to have 
also risen. See, for example, Ann Huff Stevens, Changes in Earnings 
Instability and Job Loss, 55 Industrial & Labor Relations Review 60, 60 
(2001); Peter Gottschalk and Robert Moffitt, The Growth of Earnings 
Instability in the U.S. Labor Market, in 2 Brookings Papers on Economic 
Activity 217 (1994).
    \4\ Elizabeth Warren and Amelia Tyagi Warren, The Two-Income Trap: 
Why Middle-Class Mothers and Fathers Are Going Broke (2003).
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    Income volatility is a serious social policy concern because it 
imposes both psychological and economic costs on families, especially 
when it involves sudden income declines. Economic insecurity can 
heighten anxiety and family conflict.\5\ It creates incentives not to 
take on risky jobs or invest in goods, like higher education, that may 
generate an uncertain but greater expected return for the individual 
and society.\6\ In addition, families with relatively volatile incomes 
likely incur additional expenses as a result of the unplanned changes 
in their standard of living. For instance, they may move more often or 
incur high-interest debt in order to keep up with relatively fixed 
expenses, like mortgage payments and utility bills.
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    \5\ See, for example, Patricia Voydanoff, Economic Distress and 
Family Relations: A Review of the Eighties, 52 Journal of Marriage and 
the Family 1099 (Nov. 1990).
    \6\ See, for example, Kathryn L. Shaw, An Empirical Analysis of 
Risk Aversion and Income Growth, 14 Journal of Labor Economics 626, 
626, 641-42 (1996); Orley Ashenfelter and Cecilia Rouse, Schooling, 
Intelligence, and Income in America: Cracks in the Bell Curve (National 
Bureau of Economic Research Working Paper No. 6902, Jan. 1999).
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    The economic costs associated with income fluctuations are largest 
for middle- and low-income families, and those that are relatively 
disadvantaged. Unlike more wealthy families, these families typically 
have little savings and few assets against which they can borrow.\7\ 
Downward income shocks for these families are also more likely to 
result in earnings reductions that persist over a long period of time 
and are passed on to their children.\8\
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    \7\ Edward N. Wolff, Recent Trends in Wealth Ownership, 1983-1998 
(Levy Economics Institute Working Paper No. 300, Apr. 2000).
    \8\ Philip Oreopolous, Marianne Page and Ann Huff Stevens, The 
Intergenerational Effects of Worker Displacement 14 (National Bureau of 
Economic Research Working Paper No. 11587, 2005).
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