Mandated Benefits: The Firm as Social Agent of the State
JULY 01, 1988 by RICHARD B. MCKENZIE
Professor McKenzie teaches in the Economics Department at Clemson University. This article is adapted from his Cato Institute book, The American Job Machine (New York: Universe Books, 1988).
There is a growing movement in Congress to force businesses into providing a wide range of employee benefits. These benefits include mandated health insurance for employees and dependents, life insurance, parental leave, day care, a higher minimum wage, employee consultation rights on pension investments, severance pay, retraining, and pre-notification of plant closings. The key word here is “mandated”—all these benefits would be required by law.
The current interest in mandated benefits appears to stem from three main sources. The first is statistical. Numerous studies have uncovered gross inefficiencies in government delivery systems, compared with the private sector. Surveys also have shown that many American workers receive substantial employment benefits, while other workers receive few such benefits. Similarly, a string of reports has indicated that many employees are not provided with “adequate” notice of the closing of their plants.
Proponents seem to think that if these benefits are not voluntarily provided by employers, then they should be mandated by government. They also seem to think that mandated benefits will improve the welfare of workers.
The second reason for the movement toward mandated benefits stems from massive Federal deficits, which are limiting Congress’ ability to authorize new social programs. Imposing the costs on business, therefore, is an attractive alternative. There is political resistance to raising taxes or even spending more Federal money, but apparently disguising the costs of various social programs by passing them through as higher prices for goods and services is considered to be more politically palatable.
Somewhat ironically, the third source of interest in mandated benefits is a strange twist to the case for privatization: if it is a good idea to privatize some governmental operations to make them more efficient, then making the firm the delivery agent for social services should improve the efficiency and quality of social programs.
Advocates of these programs also argue in terms of social costs. Plant closings, for instance, create problems for local communities. By making firms social agents of the state, firm managers will have to consider these outside costs.
Mandated worker benefits are not new. Mandated money benefits, commonly called the minimum wage, appeared in the 1930s. What we now are seeing is an extension of the rationale behind minimum wages to a wide variety of employment benefits.
What supporters of mandated benefits fail to see is that workers are paid not simply in terms of so much money per hour, but in terms of “payment bundles” that include money wages as well as nonmonetary benefits such as health and life insurance, vacation time, rest periods, subsidized lunches, child care, severance pay, and working conditions. Workers strive to maximize their payment bundles—as they themselves evaluate them—and not just their monetary incomes.
At any given level of worker productivity, payment bundles cannot exceed an amount which, over time, will cause the firm to break even—otherwise the firm will close. Thus, new legislation requiring employers to include specific wage or fringe benefits in their payment bundles effectively requires employers to withdraw other benefits that are not required, or to make their employees work harder to offset the greater costs of the mandated benefits.
Mandated benefits can cause the value Of the payment bundles as judged by employees (not by Congress) to fall. Workers, after all, can negotiate the inclusion of fringe benefits in their payment bundles, in return for forgoing higher wages or other benefits. When such trades are not made in worker contracts, it must be presumed that a sizable percentage of the covered workers prefer not to make such trades.
Assessing the Loss to Workers
The loss to workers because of mandated benefits also can be assessed from the impact of these benefits on employment opportunities. Obviously, those workers who remain unemployed because of the added employment costs of mandated benefits are worse off because of the government action.
Not so obviously, even the workers who retain theft jobs can be worse off—to the extent that the value of their payment bundles decreases. The value of theft payment bundles can be expected to fall primarily because the reduced demand for workers—due to mandated benefits—means that their bargaining positions will be impaired. The number of jobs can be expected to fall because the increase in the costs of hiring labor will tend to be reflected in higher prices and lower sales. As a consequence, fewer workers will be needed. Another point should be mentioned: the costs of mandated benefits will not be incurred when foreign workers or labor-saving equipment are used.
Consider, as a special case, plant-closing restrictions. The restrictions are a fringe benefit that carries costs in terms of reduced managerial flexibility, diminished access to investment capital (which will shy away from affected firms), and the potential loss of business once a closing has been announced. Such restrictions, as with all other mandated benefits, add to the costs of doing business in the affected region, and therefore discourage firms from opening plants. The closing restrictions may save some jobs for a time, but they also tend to reduce business investment and decrease the number of new jobs. Plant-closing restrictions can encourage firms to open their plants in foreign countries and to substitute, where feasible, machines for workers.
Of course, many firms do give notice of pending plant closings, offer severance pay, and consult with their workers concerning alternatives to closings. However, production circumstances differ and workers vary in terms of their preferred payment bundles. Many of the firms that have given a substantial notice did so because of a negotiated agreement under which workers gave up something in the form of wages or other benefits in order to receive the notice. The fact that many firms did not give notice—and did not violate a contract in the process—indicates that many workers felt, at the time of the contract, that the notice was not worth the attendant sacrifice.
Mandated benefits are especially troublesome when, in practice, they don’t apply equally to all workers. Such laws make employment of the covered workers relatively more expensive, compared with other workers and compared with the costs of machinery. Pa-rental-leave laws will tend to raise the costs of hiring workers in their child-bearing years, especially women workers. Catastrophic-health-insurance requirements will tend to raise the costs of hiring older workers. Laws that require firms to continue the medical coverage of their workers when they are laid off or terminated will tend to raise the costs of hiring workers in unstable or high-risk jobs.
In addition, mandated benefits don’t apply equally to all firms. Those firms that have fringe benefits which exceed the mandated benefits will not be directly affected by the mandates. However, they can be indirectly affected-to their benefit. In the case of minimum wages, firms facing competition from low- wage firms often have a private stake in minimum wages because such legislation snuffs out existing and potential competition. Similarly, firms facing competition from “low fringe-benefit” firms have a private interest in mandated benefits, since such benefits harm their competitors.
Practically everyone engaged in the debate over mandated benefits would prefer that all workers have higher wages and more benefits.
This is especially true when we address the problems of low-income Americans. However, the main problem of low-income workers is a lack of job skills, which leaves them little choice but to accept low wages and low ben efits. Mandated benefits will do nothing to solve the problems of these workers, indeed, by wiping out employment opportunities, mandated benefits are counterproductive, especially for the most disadvantaged in labor markets. Mandated benefits will not supplant the welfare state; mandated benefits, instead, will hasten the growth of an even larger welfare state—to take care of those banished from constructive employment.