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President Obama's budget calls for a new wage insurance program. Here's what that means.

Gabriella Demczuk/Getty Images

Following up on an idea briefly mentioned in the State of the Union address, President Obama's fiscal year 2017 budget includes a brand new policy idea: wage insurance.

Congress isn't going to do it, of course, but it's a very interesting inclusion because we haven't traditionally seen this idea on Democratic Party wish lists. The fact that the president is pushing it now is a strong sign the administration would like to plant wage insurance as a seed in the minds of congressional Democrats even after Obama leaves the White House.

The basic theory of wage insurance is that this could be a natural expansion of the existing social insurance state, which currently helps people out in the case of illness, disability, retirement, or temporary unemployment. But what the current system doesn't do much is help people or communities hit by the inevitable ups and downs of structural economic change.

What's this supposed to solve?

The current unemployment insurance system implicitly imagines a world of generic workers, generic companies, and generic skills. You're minding your business, and then — bam — unexpectedly the company you work for shuts down. Now you're out of a job for a bit, and you need some money to help keep you afloat while you look for new work. Soon enough, you get a new position at a new company doing similar work for similar money.

Of course, that does happen, which is why unemployment insurance exists in the first place, but there are lots of people who lose their jobs and then can't find similar work at similar pay.

My mother, for example, was an analog-era page designer for magazines, and when the world shifted to digital desktop publishing software her years of skills and experience were substantially devalued. Factories leave a town and never come back. Often, workers left behind by these kinds of changes turn to lower-paid, lower-skilled jobs.

As the overall level of skill and education in the workforce grows (which is actually a good thing), the risk that workers will be unable to find reemployment at the exact same skill and wage level will also rise.

The basic idea of wage insurance is that workers should be insured not just against the risk of losing a job, but against the risk of being forced to switch to a lower-paying one.

How does Obama's plan work?

The basic idea is that you would get 50 percent of the difference between your old salary and your new salary in the form of a check coming out of your state's unemployment insurance program.

The fine print:

  • You have to have worked at least three years at your old job.
  • Your new job must pay less than $50,000 a year.
  • The maximum amount of money available is $10,000 over two years.

So if you worked for three years at a job that paid you $55,000 a year, got laid off, and then took a new position that pays $45,000 a year, you could get $5,000 a year in wage insurance for two years while you build skills and experience in your new position.

How is this paid for?

The costs of the wage insurance program are covered as part of a larger overall of how unemployment insurance taxes work.

At the moment, the Federal Unemployment Insurance Tax Act (known as FUTA) levies a 6 percent tax on the first $7,000 of an employee's wage income and allows states to choose their own tax rate to levy on that same $7,000 base. Since the $7,000 has not been indexed to inflation, the tax base has eroded over time and left many state UI funds in bad condition. Obama's budget proposes raising the tax base all the way up to $40,000, indexing it to inflation, and then lowering the tax rate commensurately. The inflation indexing would make this a revenue-positive change in the long run, and raising the base would give state governments the opportunity to capture more revenue to rebuild their UI funds.

The administration's assumption is that these changes would let states get the money they need to go forward with the wage insurance plan.