The Impact of a Health Insurance Mandate on Labor Costs and Employment

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Speaking to the American Hospital Association in August 1993, Hillary Rodham Clinton question why companies that do not provide health insurance to their employees should be allowed to “get what amounts to a free ride.”

With these words Mrs. Clinton—who has well learned the inner workings and flaws of the nation’s health care system—indicated that she had no idea at all of how health care is actually financed in America. Mrs. Clinton has confused employment-based health insurance with employer-paid health insurance. In fact, there is no such thing as employer-paid health insurance. All employees work for a compensation package that includes cash and benefits. The absence of a payroll deduction does not make health care an employer-paid fringe benefit, for such a benefit is accompanied by lower cash earnings.

Because of this confusion, Mrs. Clinton has failed to ask the question that belongs at the core of any discussion of a health care mandate: what is the impact on employment of a federally-mandated health insurance benefit that is equivalent to a $5,000- $6,000 wage increase?

In this study, The Impact of a Health Insurance Mandate on Labor Costs and Employment, Dr. June O’Neill and Dr. David O’Neill answer that unasked question. Recognizing that a mandate requiring employers to pay workers’ health insurance expenses will manifest itself as an increase in labor costs, Drs. O’Neill estimate that this increased cost will lead to the loss of 3.1 million jobs nationwide. These lost jobs will be heavily concentrated in just a few industries. More than 75 percent of the lost jobs will be in industries such as restaurants (828,000 jobs lost), other retail trade (726,000 jobs lost), and agriculture (194,000 jobs lost).

The differences in job losses in different industries reflect the differing wage levels (low-wage industries are less able to shift cost increases back onto payrolls) as well as the differing numbers of insured and uninsured workers in each industry.

The key issue with employer mandates is their impact on labor costs. Rather than approaching this as a problem peculiar to small businesses, Congress and the Administration must look much more closely at low earnings as the determinant in access to health insurance. Uninsured workers are nearly always low-wage employees, and these people are concentrated in a narrow set of industries. Consequently, these industries will bear a disproportionate burden of the job loss associated with a new employer mandate.

Labor cost increases drive the job loss. This is particularly true in low-wage industries where wages are too low to permit shifting of the mandate’s cost back onto wages. Higher wage industries, on the other hand, can much more readily shift the increased costs back onto wages. When industries cannot shift this cost the inevitable result is the loss of jobs, with the job loss increasing with the unshiftable cost.

Concern over the impact of a health insurance mandate is not limited to academic debate. On its editorial page The Washington Post recently described the effect of a health care mandate as “a pretty substantial addition to the minimum wage of $4.25 an hour and would inevitably mean fewer jobs for unskilled workers.” Robert Shapiro, vice-president of the Progressive Policy Institute, stressed this same point. Writing in The New Democrat, he said that “…by most employers’ calculations, the productivity of low-wage workers cannot justify health-care coverage that would substantially raise their total compensation. Far from guaranteeing benefits to low-skilled workers, a rigid employer mandate, but the economics of it, would probably cost many of them their jobs.”

Moreover, the analysis present by Drs. O’Neill is entirely consistent with mainstream economic thought. To confirm this, the Employment Policies Institute commissioned the Survey Center at the University of New Hampshire to survey members of the American Economics Association. (The Association is the leading professional body for American economists.) Eighty percent of economists responded that a health care mandate would result in lost jobs for lower wage workers. This study by Drs. O’Neill quantifies that loss.