Employer Mandates; D. Henderson

EMPLOYER MANDATES: A THREAT TO EMPLOYEES 51 16. Understanding Social Security, pp. 4, 5,6. 17. 1992 Annual Report, OASDI, pp. 31-33; 1993 Annual Report, OASDI, pp. 33-35; 1994 Annual Report, OASDI, pp. . 26-28. 18. 1992 Annual Report, OASDI, p. 24. 19. 1993 Annual Report, OASDI, p. 29. 20. 1994 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, p. 3. 21. See footnote 3. 22. 1990 figure: Robertson, p. 116; 1994 figure, Office of the Actuary, Social Security Administration. 23. Robertson, p. 121. 24. Understanding Social Security, pp. 4-5. THEFREEMAN IDEASON L1BERlY 25. Robertson, pp. 90-91. 26. See, e.g., Dorcas R. Hardy and C. Colburn Hardy, Social Insecurity: The Crisis in America's Social Security System and How to Plan Now For Your Own Financial Survival (New York: Villard Books, 1991), pp. 27-41. 27. Robertson, pp. 231-232. 28. A Compilation of the Messages and Papers of the Presidents, vol. XII (New York: Bureau of National Litera ture, Inc., 1897), p. 5142.

29. Allan Carlson, Family Questions: Reflections on the American Social Crisis (New Brunswick, N.J.: Transaction, Inc., 1988), p. 222. EmployerMandates: A Threat to Employees by David R. Henderson M ost people who want to force employ ers to pay for their employees' health insurance have so far ducked the facts about who pays for "employer" mandates. They've had good reason to duck them, because the facts are clear. Economic anal ysis and economists across the political spectrum who have studied the issue are unanimous that the main people who pay for employer mandates are employees. Why? Because requiring an employer to provide health insurance does not magically make the employee more productive. Say you're an employee and your annual output Dr. Henderson is currently the John M. Olin Visiting Professor at the Center for the Study of American Business, Washington University, in St. Louis. He is on leave from the Naval Postgraduate School in Monterey, California, where he is an associate professor ofeconomics, and was previously senior economist for health policy with the President's Council ofEconomic Advisers.

is worth $30,000. Competition among em ployers for your services forces your em ployer to pay you about $30,000 in salary and benefits. Now the government requires your employer to pay an extra $2,000 for your health insurance. If your boss contin ues to pay you $30,000 as well, he'll pay $32,000 to keep you. But this isn't worth while. He would be paying $2,000more than the $30,000 worth of output that you pro duce. The solution, for you to keep your job, is for your employer to cut your salary and other benefits from $30,000to $28,000. Net result: you get $2,000in health insurance at the expense of $2,000 in salary and other benefits. You pay for employer-mandated health insurance. It may look as if employees break even with the mandate. Look again. The em ployer wasn't providing health insurance for one reason: it wasn't worth it to the em ployee. The employer would have preferred to give a $2,000 health-insurance policy 52 THE FREEMAN • JANUARY 1995 rather than salary, to avoid the 7.65 percent Social Security and Medicare taxes on pay.

The fact that the employer wasn't providing the health insurance must mean that the employee did not value it as much as pay and other benefits. So the mandate unambigu ously makes the employee worse off. That the employee pays for mandates was my main message in my testimony to Senator Edward Kennedy's Senate Labor Committee in July 1994.It was also the main message of a liberal economist who sup ported mandates. Jonathan Gruber, an economist at MIT, was invited by Senator Kennedy's committee to defend mandates and to argue that they don't cost manyjobs. The key to Gruber's argument was his evidence that mandates are mainly paid for by employees. Gruber had co-authored a study with Alan Krueger of Princeton Uni versity on the effect of increases in the cost of workers' compensation, the oldest man dated benefit in the United States. (Krueger, incidentally, will soon be the chief labor economist under Secretary of Labor Robert Reich.) Gruber and Krueger found that for every dollar increase in workers' compen sation, 85 cents was paid by workers.

Kennedy and the other Democratic sen ators spoke throughout the hearing as if employer-provided health insurance is a free lunch for employees. Senator Paul Si mon made the free-lunch assumption ex plicit. He posed the false alternative of a given wage without health insurance or the same wage with health insurance and asked one witness which he thought most people would prefer. Duh. The Democratic side of the Senate staff had invited two women from Whitesburg, Kentucky-Brenda Newman and Nellie Kincer-who had gone without health in surance. Both women had found health insurance too expensive. Nellie Kincer said she would rather spend her meager income on rent and groceries than on expensive medicine. Kennedy and the other Demo cratic senators posed as these women's champions. Yet their own bill was designed to prevent those women, and every other worker, from makingjust such tradeoffs. No wonder Kennedy asked no questions of either Gruber or me.

That Gruber and I agreed was not just a fluke. Economists, whether or not they believe in mandates, do not kid themselves that employers pay for them. David M. Cutler, who defended employer mandates at the annual meetings of the American Eco nomic Association, and who was until re cently a senior economist with President Clinton's Council of Economic Advisers, recently wrote: "Most of these cost changes are likely to show up as changes in wages ... " In its August 1994 analysis of the effects of former Senator George Mitchell's healthcare bill, here is what the U.S. Con gressional Budget Office said about the ef fect of requiring employers to pay for their employees' health insurance: The imposition of the mandate would raise the cost of employing workers at firms that do not currently provide insur ance. Economic theory and empirical re search both imply that most of this in creased cost would be passed back to workers over time in the form of lower take-home wages.

Even President Clinton's Council of Eco nomic Advisers agrees. In the annual Eco nomic Report ofthe President, published in February 1994, the President's economists write: " ... the dominant effect of increases in health care costs in the past has been a reduction in the real wages received by employees." What happens if wages don't fall one dollar for every dollar of health insurance costs? Then jobs will be destroyed. Again, this is not controversial. As Jonathan Gru ber stated in his testimony, "If full shifting ["shifting" is the term used to describe the fall in wages when mandates are imposed] takes place, then the total cost of the com pensation to the firm will not rise, and there will be no need to layoff workers. If it does not, then compensation costs will rise, and there will be layoffs." Those who want employer mandates are stuck. On the one hand, they don't want to believe that em ployer mandates will killjob growth. On the EMPLOYER MANDATES: A THREAT TO EMPLOYEES 53 other hand, as Senator Kennedy and others learned, the only way not to believe man dates kill growth is to believe that employ ees pay for them.

If employees pay for mandates, why then do so many politicians advocate mandates? Alan Krueger answers this succinctly: "The costs of mandates are hidden, which makes them politically feasible." And of course workers can't be paid less than the minimum wage. This means that many workers at or slightly above the min imum wage would risk losing their jobs. Gruber minimized this risk but here he was on shaky ground. He leaned heavily on research by Krueger and David Card of Princeton University, who surveyed fast food employers before and after the mini mum-wagechange. Card and Krueger found no reduction in employment after the min imum wage increased. But their study was biased against such a finding. By surveying the same employers before and after, they did not allow for the possibility that the minimumwage increases put marginal com panies out of business. Moreover, Krueger himself is skeptical at the attempt to apply his minimum wage finding to health care.

Krueger writes: "This evidence [on the minimum wage] has been cited by the First Lady and others as support for the view that the health care mandate will not reduce employment. Even though I am a contrib utor to this literature, I am not sure it applies to a health care mandate." Krueger esti mated that the Clinton mandates would destroy 200,000to 500,000jobs. Many of the people who advocate em ployer mandates believe themselves to be truly humanitarian. It is humanitarian to spend your own money to provide health care for poor people. But there is nothing humanitarian at all about forcing poor peo ple to spend their own money on health insurance when they have other more press ing concerns. D The Officers and Directors of THE INDEPENDENT INSTITUTE proudly announce the 1995 OLIVE W. GARVEY FELLOWSHIPS The GarveyFellowshipswill be awarded for the three best essayson the topic: "The Road to Prosperity and Human Welfare: Free Markets or Government Controls?"

E ssays of not more than 3,000 words may be submitted by college students 35 years of age or younger. The essays will be judged by a panel of distinguished scholars. Deadline for submission is May 1, 1995. First Prize, Olive w. Garvey Fellowship Award: $2,500 Second Prize, Olive w. Garvey Fellowship Award: $1,500 Third Prize, Olive w. Garvey Fellowship Award: $1,000 Forfurther information,pleasecontact: The~ INDEPENDENT ~ INSfITlITE 134 Ninety-Eighth Avenue, Dept. GF6 Oakland, CA 94603, USA Phone: 510-632-1366 • FAX: 510-568-6040 Economics on Trial European Unemployment: The Age of Ignorance, Part II by Mark Skousen "This persistence of high unemployment in the European Community is a major puzzle. " -Charles R. Bean, "European Unemployment: A Survey," Journal of Economic Literature, June, 1994 "Is This the Age of Ignorance-Or Enlightenment?", my most controversial column, was published in the June 1994 issue of The Freeman. It revealed how a growing number of well-trained economists plead ignorance on the most fundamental aspects of the budget deficit, taxes, infla tion, the stock market, and the business cycle. Those cited included Herbert Stein, Robert J. Barro, and Paul Krugman.