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Lecture #714 on Jobs and Jobs and Labor Policy

July 31, 2001

Trade Adjustment Assistance: A Flawed Program

By

The Trade Adjustment Assistance (TAA) program was established under the Trade Act of 1974 and is administered by the Employment and Training Administration (ETA) in the U.S. Department of Labor. The program's goal is to offer assistance to eligible workers who are adversely affected by trade. Available assistance includes job training, Trade Readjustment Allowances, job search, relocation, and other services concerning re-employment. The current TAA authorization will expire on September 30, 2001, and new legislation (H.R. 85) has been introduced that would reauthorize the TAA program through FY 2006.

PROBLEMS WITH THE CURRENT TAA PROGRAM

Despite widespread support for the objective of the program, the effectiveness of the TAA program has been the subject of widespread debate. One concern expressed is whether a special program for trade-related job losses should exist. Based on the principle that job displacements caused by foreign competition are no different from job displacements caused by any other form of competition, the Reagan and first Bush Administrations each attempted to consolidate the TAA program with other existing job training programs.2 Indeed, the number of workers affected by trade is minimal compared to those who lose their jobs for other reasons: Of the 3,245,034 workers who were laid off and filed for unemployment insurance from 1997 through 1999, only 2.1 percent lost their jobs due to import competition or overseas relocation.3 This percentage is lower than the number of people who lost their jobs due to labor disputes during the same time frame.

Many have also criticized the TAA's overall effectiveness, as well as its ability to monitor its own success rate. Specifically, the criticism has focused on the program's inadequate attention to performance measures and failure to conduct proper evaluations of the results program participants achieve. The TAA program does not measure results. Instead, the Department of Labor and the ETA set goals for the number of assistance programs each center implements per year, not whether the aid proves successful.

In addition, the bipartisan U.S. Trade Deficit Review Commission conducted a survey on the effectiveness of the TAA, which revealed that, of the 46 state workforce agencies that responded, 19 considered the TAA programs "inadequate." Of the 23 agencies that considered the programs adequate, 19 responded that there was need for "improvement."4 The state agencies complained that the regulations for the TAA programs are unnecessarily complex and create needless red tape.5

Although the Department of Labor tightened controls after an inspector general's report in 1993 found a number of abuses in the TAA system, the controls themselves have not been evaluated for their effectiveness.

Worse, instead of offering fast, effective help to displaced workers, the TAA program has become a mere compensation procedure, effectively acting as a disincentive for workers to quickly find new employment. This is possible under the TAA program because workers are allowed to obtain a training waiver, which allows them to collect the cash payouts (the Trade Readjustment Allowance, or TRA) without enrolling in any classes. According to the Department of Labor, 38 percent of TAA participants who left the program in 1999 received some type of training waiver, more than the number of displaced workers that enrolled in those training courses. The numbers bear out this fact: Between 1995 and 1999, the TAA program spent $663.6 million for basic allowances and $239.7 million for additional allowances. This totals $903.3 million in five years for payouts. Meanwhile, only a third as much went to training costs in the same time period. And only $9 million--or one hundredth as much--over those five years went to job search and relocation costs, in part because so few of the TAA-eligible workers chose to use these elements of the benefits program. According to an October 2000 report by the U.S. General Accounting Office,

Most state officials we surveyed said job search and relocation benefits have not been heavily utilized because workers are reluctant to move to new areas, primarily because of family commitments or ties to the community.6

Even if more funds had gone to the training aspects of the program, the training programs themselves are ineffective. The Institute for International Economics, for example, points out that

Workers have no guarantees of employment when they finish the training programs. For this reason there is broad consensus that the best training is delivered on the job, or if workers are already at a job, then in supplemental programs that workers help pay for themselves and choose to attend at night or other off hours.7

Other problems with the TAA program include:

  • The program as it stands does not address earning loss after reemployment. Some limited data suggest that 75 percent of workers who left the program found new jobs, but many earned much less that their former wages.
  • Poor program tracking system: Despite some improvement in monitoring program outcomes, data collection for such purpose is still poor. Thus, accountability for the program is lacking because it is difficult to find out just what success the program is having. For fiscal years 1995 through 1999, an average of $9.8 million was given to each of the 12 regional Trade Adjustment Assistance Centers (TAAC) operating under cooperative agreement with the Economic Development Administration (EDA). The effect of the program, however, is not conclusive since there is no formal evaluation process (monitoring or tracking) for program results, and as a result, there is none of the information necessary to assess the TAACs' performances.
  • Weakness in internal control. Some reports indicate that workers may receive benefits for which they are not eligible, through the program's internal control weakness.

CONCLUSION AND RECOMMENDATION

The TAA program does not work as it is designed. The current TAA program has failed to provide effective assistance, one of the crucial factors for a successful adjustment program. 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. The Trade Deficit Review Commission recommended "wage insurance" as a more comprehensive worker adjustment solution. Robert Litan of the Brookings Institution and Lori Kletzer of the Institute for International Economics proposed putting wage insurance at the centerpiece of a more effective adjustment program, attracting support from a broad spectrum of policymakers and free-trade proponents. Two programs Litan and Kletzer propose are wage insurance and subsidies for health insurance.
  • Wage insurance would allow qualifying displaced workers to receive benefits upon reemployment, protecting workers from the loss of income that can result from finding a new job that does not pay as well. This applies to workers who had been employed at their previous job for at least two years, and in moving to the new job, suffered an earnings loss that can be documented. The insurance would be paid only after workers found a new job. The workers would receive the wage insurance for up to two years following the initial date of job loss.
  • Health insurance subsidies would be provided to qualifying displaced workers for up to 6 months, or until they found a new job.
  • Both programs would provide benefits to full-time workers who have been dislocated, for any reason (not just trade), from jobs they had held for at least two years.

In particular, Litan and Kletzer argue that wage insurance would fix a deficiency of the current TAA program. Unlike the current program, which works as a disincentive for rapid reemployment, the proposed wage insurance program would strongly encourage workers to quickly find new jobs since they would not receive the assistance until this takes place.

A central issue in this reauthorization debate is the question of what is the proper role of government in the United States. If we decide that one of government's duties is to give money to workers who have lost their jobs, for whatever reason, then we should do it effectively and efficiently. Ensuring the existence of an effective program will fulfill our responsibility to all Americans whose livelihoods are affected through the taxes they have to pay in order to make any such program possible. It is a betrayal of this responsibility to continue to fund a program that has been proven ineffective, and which cannot even measure its own results.

Denise H. Froning is a policy analyst in the Center for International Trade and Economics at The Heritage Foundation. This lecture is based on her testimony before the Subcommittee on Tax, Finance and Exports of the House Small Business Committee on July 24, 2001.

Show references in this report

1. The author would like to thank Anthony Kim, Research Assistant in the Center for International Trade and Economics, for his valuable contributions to this presentation.

2. James R. Storey, Trade Adjustment Assistance for Workers: Proposals for Renewal and Reform , Congressional Research Service Issue Brief for Congress, IB98203, October 3, 2000.

3. Calculated from data in Table 3, "Reason for Separation" in Extended Mass Layoffs in 1999 , U.S. Department of Labor, Bureau of Labor Statistics, Report 945, October 2000.

4. U.S. Trade Deficit Review Commission, The U.S. Trade Deficit: Causes, Consequences, and Recommendations for Action, November 2000, p. 164.

5. Ibid.

6. U.S. General Accounting Office, Trade Adjustment Assistance: Trends, Outcomes, and Management Issues in Dislocated Workers Programs, GAO-01-59, October 2000, p. 11.

7. Lori G. Kletzer and Robert E. Litan, "A Prescription to Relieve Worker Anxiety," International Economics Policy Brief, Institute for International Economics, February 2001.

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