Yesterday’s New York Times slouches toward economic literacy – though not all the way – in a piece entitled “Rising Cost of Health Benefits Cited as Factor in Slump of Jobs”. Overlooking the facts that the “slump in jobs” is largely a myth (one month’s poor showing doesn’t establish a trend) and that the article is primarily advance notice of a forthcoming Kerry campaign press release, one is happy to see an acknowledgment that increases in the marginal cost of labor have a negative impact on employment.
Government data, industry surveys and interviews with employers big and small indicate that many businesses remain reluctant to hire full-time employees because health insurance, which now costs the nation’s employers an average of about $3,000 a year for each worker, has become one of the fastest-growing costs for companies.
If only the Times would follow the same logic when it editorializes about minimum wage laws! Still, whether or not the paper is consistent, it is correct in principle. What follows after that is less sound.
The notion pushed by a Kerryite spokesman, and uncritically echoed by the article, is “that industries with more health care benefits – like automobile manufacturing – have suffered the biggest losses in jobs and that those, like food service, that typically offer few benefits have realized the biggest gains.” Since the high health costs and job losses are “in high-wage, high-benefits sectors”, it supposedly follows that job creation can be enhanced by shifting the cost of health insurance from employers to taxpayers. To put it another way, if Wal-Mart and its customers subsidize General Motors’ gold-plated health care plan, GM will, the Times imagines, hire more people.
That reasoning is, of course, a ridiculous example of post hoc, ergo propter hoc. The general decline in manufacturing employment is a worldwide phenomenon, resulting from the fact that goods can nowadays be produced with smaller labor inputs than in the past. And the particular problems of the U.S. automobile industry have many causes other than the burden of health care plans for employees. To the extent that health costs are part of the problem, the biggest portion is the fixed cost of benefits for retirees, not the incremental cost of coverage of new workers.
In any event, the Times ignores a key fact: Employers are not compelled to pay any of their employees’ health care costs. Therefore, the fact that they choose to do so cannot (leaving aside some market imperfections that I’ll discuss in a moment) increase overall wage costs. As one element of the total wage package increases, others will decline. The article recognizes this fact at one point, but the writer doesn’t see its implications:
The trade-off between health and wages has become a prime workplace topic. In 2002, Local 226 of the hotel and restaurant workers union in Las Vegas negotiated a contract agreement with casino and hotel operators for a blanket raise of 60 cents an hour, which the union could apportion between wages and health care.
The union considered the deal a victory because it allowed workers to maintain health care benefits at virtually no cost. In the first year of the contract, though, all of the increase ended up going to health care, leaving nothing for higher wages. “It was the first time we had to sacrifice wages to health care,” said Pilar Weiss, assistant political director of Local 226.
Put another way, the employer paid the market price for labor, and its workers chose to allocate a portion of that amount to health insurance in lieu of all of the other goods and services that they could have bought. They are unhappy that insurance isn’t cheaper, which may be a legitimate complaint but has no bearing on the article’s thesis that health care costs reduce employment.
The easiest way for companies to keep labor costs steady despite a rise in the price of health care is to pay a smaller share of the cost out of their own pockets, and that is exactly what they are doing. The just-released Marsh Inc. Mid-Sized Employer Health Plans Survey shows that “[o]n average, small and mid-sized businesses held health costs to single-digit growth last year”. That is what those of us who believe that wages are set by market forces rather than that arbitrary whim of either business or government would expect.
So the analysis behind the Times-Kerry view, in which there is a simple negative correlation between health costs and job creation, makes little sense. Nonetheless, it has a small nugget of truth, though not one that any dogmatic liberal is likely to want to recognize.
A major reason why businesses pick up any of the tab for their workers’ illnesses (not the sole reason, but let’s not complicate the discussion excessively) is that health insurance and benefits are tax-deductible only if obtained through one’s employer. The Tax Reform Act of 1986 eliminated medical deductions for almost everybody (except for the very ill or very poor whose expenses exceed 7½ percent of adjusted gross income). It retained the exclusion from taxable income of employer-paid health insurance, medical benefits provided by self-insured employer plans and employee insurance premiums paid through employer-sponsored “cafeteria plans”. As a result, employer plans are more tax-effective than any kind of coverage that individuals can obtain on their own. (Health Savings Accounts – the one good idea in the Medicare drug prescription act – are a first start, but no more than that, toward breaking up the employer plan monopoly.)
A company’s most valued (and correspondingly best-paid) employees are the ones most sensitive to tax considerations, because they are in the highest tax brackets. They naturally want their employer to offer a health care plan, and the employer has a strong incentive to oblige them. The government is, in a sense, subsidizing the cost through tax breaks that would otherwise be unavailable.
There are two basic ways to provide coverage: through health insurance or with a self-funded plan. In the former, the employer and employees pay premiums, and the insurer reimburses the expenses that they incur. In the latter, the employer steps into the insurer’s shoes and pays claims directly, usually requiring employees to bear the cost through contributions from their own pockets. For various historical reasons, these two types of plan have important economic differences.
Insured plans are, mutatis mutandis, more expensive than self-insurance. The reason is that states, which are the primary insurance regulators, impose “mandates”, types of coverage that policies must provide whether or not insured parties want it. States currently impose a total of more than 1,800 separate mandates. The effect is to increase premiums by as much as 45 percent in some states.
Mandating benefits is like saying to someone in the market for a new car, if you can’t afford a Lexus loaded with options, you have to walk. Having that Lexus would be nice, as would having a health insurance policy that covers everything one might want or need. But drivers with less money can find many other affordable options; whereas when the price of health insurance soars, few other options exist.
According to a 1999 study conducted by the Health Insurance Association of America (HIAA), as many as one in four individuals who are without coverage are uninsured because of the cost of state health insurance mandates. [Victoria Craig Bunce & J. P. Wieske, “Health Insurance Mandates in the States, 2004” (PDF file)]
Self-insurance is a cheaper option, because states aren’t allowed to regulate non-insured, employer-sponsored health plans. (There are a few federal mandates, but those apply equally to insured and non-insured plans.) The catch is that self-insured plans must, as a general rule, provide the same benefits to employees at all pay levels; otherwise, the benefits become taxable to higher paid workers (defined for this purpose as the top-paid quartile, not just the executive suite). Hence, in this case, health care ceases to be a wholly voluntary cost for the employer. For lower-paid workers, whose inclusion in the plan is essential to satisfy the “nondiscrimination” rules, total wages can’t easily be held constant as health care becomes more expensive. At some point, the aggregate of the minimum wage, health benefits and other mandatory labor costs, such as Social Security contributions, exceeds the value of the worker’s output, at which point the job ceases to be filled.
There are straightforward ways to counteract this negative effect of health costs on employment, viz., abolish state insurance mandates, or place employer and non-employer plans on a level tax footing (by making all medical expenses deductible, or none). Needless to say, John Kerry and the New York Times would denounce these options as right-wing heartlessness. They can glimpse the problem dimly but not well enough to embrace measures that would help solve it.