All Commentary
Sunday, January 1, 1995

Employer Mandates: A Threat to Employees

Hidden Costs Make Employer Mandates Politically Feasible

Most people who want to force employers 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 analysis 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 is worth $30,000. Competition among employers for your services forces your employer 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 continues to pay you $30,000 as well, he’ll pay $32,000 to keep you. But this isn’t worthwhile. He would be paying $2,000 more than the $30,000 worth of output that you produce. The solution, for you to keep your job, is for your employer to cut your salary and other benefits from $30,000 to $28,000. Net result: you get $2,000 in 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 employer wasn’t providing health insurance for one reason: it wasn’t worth it to the employee. The employer would have preferred to give a $2,000 health-insurance policy 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 unambiguously 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 supported 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 many jobs. 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 University on the effect of increases in the cost of workers’ compensation, the oldest mandated 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’ compensation, 85 cents was paid by workers.

Kennedy and the other Democratic senators spoke throughout the hearing as if employer-provided health insurance is a free lunch for employees. Senator Paul Simon made the free-lunch assumption explicit. 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 insurance. 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 Democratic senators posed as these women’s champions. Yet their own bill was designed to prevent those women, and every other worker, from making just 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 Economic Association, and who was until recently 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 health-care bill, here is what the U.S. Congressional Budget Office said about the effect 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 insurance. Economic theory and empirical research both imply that most of this increased cost would be passed back to workers over time in the form of lower take-home wages.

Even President Clinton’s Council of Economic Advisers agrees. In the annual Economic Report of the 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 Gruber 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 compensation to the firm will not rise, and there will be no need to lay off 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 employer mandates will kill job growth. On the other hand, as Senator Kennedy and others learned, the only way not to believe mandates kill growth is to believe that employees 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 minimum 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 minimum-wage change. Card and Krueger found no reduction in employment after the minimum 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 minimum wage increases put marginal companies 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 contributor to this literature, I am not sure it applies to a health care mandate.” Krueger estimated that the Clinton mandates would destroy 200,000 to 500,000 jobs.

Many of the people who advocate employer 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 people to spend their own money on health insurance when they have other more pressing concerns.