Mandated Health Insurance, the Low Wage Employee, and the Distribution of Income

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Considerable political attention has been focused recently on the claim that a large and growing segment of the U.S. population, particularly the “working poor,” has inadequate access to health care. Among the many policies that have been advocated to remedy this situation, one of the most widely discussed is a proposal to require that private firms provide health insurance for all of their employees. The objective of mandatory, employer-provided insurance is well-intentioned. However, it is quite possible that federally-mandated but privately-financed health insurance would actually harm its intended beneficiaries.

Competition among firms for productive workers leads to combination of salary and fringe benefits which provide maximum value to employees for a given amount of total compensation. Some components of these compensation packages, such as flexible hours and paid vacations, can be provided only by employers. Other types of fringe benefits—like health insurance—are most cheaply purchased by firms and then “resold” to employees in exchange for lower salaries. However, the compensation packages that emerge from labor market competition conform more closely to the preferences of employees than those which would result from a legislative mandate that some particular fringe benefit (such as health insurance) be provided by employers. Such a mandate would make workers now covered by employer-provided health insurance no better off; and many employees who are not presently covered would be made worse off by having to purchase the insurance with reductions in salary or fringe benefits which they value more highly.

Low-wage workers especially would be harmed by mandated health insurance. Some of those employees, likely to have received reduced wages, could be forced to pay either for benefits now received free through Medicaid, or for uncompensated health care, or for coverage through a family member. Others, who earn the minimum wage and have few or no non-mandated fringe benefits, may become unemployed if the cost of their compensation package increases beyond their value to the firm. The harmful consequences of mandated health insurance are even more likely for tipped employees who, because of the incomplete credit for tip income against the minimum wage, are already relatively expensive from the standpoint of the firm. As a result, the compensation package for people who work for tips contains fewer fringe benefits against which mandated health insurance can be substituted. Therefore, tipped employees will face greater layoff risk than non-tipped workers if employers must provide health insurance, since the cost of their compensation package relative to those employees who do not work for tips will increase.

The substitution away from tipped employees toward non-tipped employees and physical capital which would be induced by mandated health insurance will likely have other noteworthy ramifications. Fixed service charges will become more common and have the overall level of customer service will decline because of increased reliance on self-service and longer waiting times for customers. These inconveniences might be justified if the benefits of mandated health insurance for tipped employees were large and targeted primarily to the working poor. However, extensive research on the incidence of similar legal mandates, such as workers’ compensation and the minimum wage, suggest that tipped employees (especially those with low incomes) presently not covered by employer-provided health insurance will bear most of the cost of mandated coverage.