A Safety Net for the Job Apocalypse

Even if it's not this bad, we need to prepare

Automation and artificial intelligence are increasingly disrupting the labor market. Some see a coming “job apocalypse.” Others simply see a continuation of existing trends toward growing inequality as more and more people fall out of the middle class into less stable, lower-income employment. In either case, we are not prepared.

One of the many things that need attention is our social safety net, especially those parts of it that deliver health care and income support to those in need. This post suggests two major safety net reforms that would mitigate the impact of coming shocks to the labor market.

A scenario

A specific scenario will help focus the discussion — one based on a job category that is likely to grow in the coming years even as many routine and repetitive jobs disappear. That category comprises home health aides, personal care aides, and other occupations that can be loosely referred to as “eldercare.” These jobs are resistant to automation because they are neither repetitive nor routine. Moreover, they are jobs where people value the human touch.

So here’s the scenario: You have a nice job as a welder, which, for an experienced worker, pays about the median family income. Out of the blue, you are replaced by a robot. After a while, with your unemployment benefits running out and a growing conviction that you are never going to get another production job, an employment advisor suggests you try work as a home health aide.

There is plenty of work to be done. You have your choice of working for an agency that will place you with clients in need, or you can become self-employed, taking advantage of on-line platforms that match caregivers with customers. The catch is, you won’t be able to earn much more than $20,000 a year as you start out, and even as you gain experience, you are never going to get back to what you earned as a welder. If you’re trying to support a spouse and two kids, you’re not even going to make it up to the poverty level. Plus — your benefits are gone, your work schedule is unpredictable, and your back hurts more from lifting patients in and out of bed than it was even when you were zapping big chunks of steel together.

What reforms to the social safety net could help you survive in this new world of work?

Priority one: Decouple health care from employment

The first thing you are going to need is dependable access to health care for yourself and your family. You may miss the kind of employer-sponsored health insurance (ESI) you used to have as a welder, but although most people who have ESI say they like it, as public policy, it has serious flaws. Three of them will become even more troublesome if a full-fledged job apocalypse strikes:

• Job lock: Workers fear to change jobs, to go into business themselves, or to transition to the gig economy because they fear that they may lose access to health care.
• Inequity: Employees in the top fifth of the income distribution get an average of $4,500 in benefits from ESI while those in the bottom fifth average just $500 in benefits.
• Fragmentation: Thousands of ESI plans mean fragmentation of the health payment system, driving up administrative costs and opening new avenues for rent-seeking by providers.

How can we ensure that people without employer-sponsored insurance don’t lose access to health care altogether? Some would-be reformers advocate a “single-payer” plan like Medicare for All, but there are legitimate doubts about the affordability of that approach, and many who currently have some kind of coverage fear being forced into a one-size-fits-all government insurance plan. There are better ways to fix our healthcare system. Here are three options that could be fully funded even without increasing what the government already spends on health care:

• My favorite: Universal Catastrophic Coverage. UCC would fully protect everyone from financially ruinous medical expenses while asking those who can afford it to pay a fair share of the cost of their own care.
• A promising GOP alternative: Bruce Westerman’s Fair Care Act (FCA) would use government-sponsored reinsurance to make private coverage universal and affordable.
• A Democratic Band-Aid: Several presidential candidates propose adding a public option to the ACA. That wouldn’t go as far as UCC or the FCA, but it would give coverage-of-last-resort to people who lost, or could not afford, employer-sponsored coverage.

Priority two: A floor on income that leaves work incentives intact

Low pay is likely to be an ongoing reality for home care aides and many other service workers. If that is true, then the only realistic way to avoid ever-increasing inequality is to give people a guaranteed minimum that is high enough, when combined with the income from modestly paid work, to allow a decent standard of living. The guaranteed minimum would also give something to fall back on in times of crisis caused by recession, family obligations, illness, or disability.

Many people worry that offering people a guaranteed minimum, even at a sub-poverty level, would spawn packs of loafers living in pup tents on the sidewalk and spending their handouts on drugs and alcohol. Like most economists, I do not share that view.

The influence of income on work effort has been widely studied. Some studies are based on how people react to lottery winnings, inheritance, tribal casino dividends, and the like. Other studies use structural data on wages, salaries, and work behavior. Typically, such studies do find that, other things being equal, people tend to take work less and take more leisure as their incomes increase, but the effect is small. The majority of studies of “income elasticities,” as they are called in economic jargon, indicate that other things being equal, a 10 percent change in income will induce a zero to 1 percent increase in hours worked. And that does not mean that a 10 percent boost in income would cause 1 percent of beneficiaries to stop working altogether. More often, it would mean continuing to work but taking a vacation or day off now and then.

In real life, though, while income does tend to have a small negative effect on work effort, the amount of take-home pay a person gets from an extra hour’s work has a much stronger positive effect. Isolating that effect, it appears that a 10 percent increase in take-home pay tends to cause a 1 to 4 percent increase in hours worked. Economists call that the “substitution effect.”

A properly structure reform of the social safety net can take advantage of the fact that the strong substitution effect of higher take-home pay outweighs the weak effect of higher income. Here is what needs to be done:

First, as I have explained in detail elsewhere, any guaranteed minimum income or basic income that is used to provide a floor to people’s standard of living must replace our current fragmented, in-kind system of means-tested welfare, not be added on top of it. The problem with the current system is the way it aggressively cuts benefits for each dollar earned. A study from the Congressional Budget Office shows that when the effects of the benefit reductions in EITC, SNAP, TANF, CHIP, and Medicaid are combined, a family with income just above the poverty level may keep as little as 20 cents for each added dollar of earned income. A guaranteed minimum income would let low-income workers keep all, or nearly all, of their added earnings, greatly increasing work incentives.

Second, if you think that is not enough work incentive, the reformed safety net could pay out part of its benefits in the form of wage subsidies for low-income workers. The earned income tax credit already does that to a limited extent, but its incentive effects could be considerably strengthened. One change would be to pay benefits in the form of extra cash added to the monthly paychecks of low-paid workers, rather than as an annual tax credit. Another would be to extend the income range over which wage subsidies operate. A third would be to allow people without children to qualify for the program.

A guaranteed minimum income plus wage subsidies for low-paid workers is a combination that I call Integrated Cash Assistance. You can find a full description here.

A final caveat

Let me end with a caveat: No reform of the social safety net is going to cure all our problems. The shock of accelerating changes in the labor market, whether we call it a job apocalypse or not, is going to disrupt many lives. The effects will go far beyond the merely economic. People whose lives are upended, even with the best safety net, are going to be vulnerable to stress, depression, and anxieties that will in some cases have ugly outcomes like substance abuse, suicide, domestic violence, and child neglect.

We should not expect cash assistance alone to cure all these ills. More narrowly tailored, hands-on help will continue to be needed in many cases.

Still, I believe that a reform of the social safety net that offered universal access to health care, decoupled from employment, and replaced our current system of in-kind, means-tested welfare with a program of integrated cash assistance would make America much better prepared for a job apocalypse.

Previously posted by Fabius Maximus. Photo courtesy of Pixabay.