Mandates in Employment: A History of Added Burdens on the Unskilled

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University of Massachusetts, Amherst economist Simon Rottenberg’s examination of mandates in employment in employment is a stark reminder of the potentially devastating effects of mandated employer-provided health insurance. Commissioned by the Employment Policies Institute, the study not only points out the difference among various occupational categories but explains how these factors determine differences in the size and composition of compensation packages. In the context of today’s debate, it asks, and answers, why many working people remain uninsured. Additionally, it dramatically demonstrates the unequal—and particularly harsh—effects of employer mandates on the group most in need of insurance benefits: the unskilled workers.

Taken as a whole, the author suggests that mandates must not be considered in their individual context, but in the context of all mandates. He adds that policy makers’ current fascination with studies finding no employment effects from an existing mandate—the minimum wage—is misplaced. With history replete with examples of misguided mandates, the study makes a strong case against the imposition of further federal mandates, arguing instead for market-driven responses to employer and employee needs.

Differences in the level of total compensation paid to individuals are known as “compensating differences” and reflect the market valuation of the services offered, the skill involved in the delivery of those services, the difficulty in acquiring those skills, as well as other factors. Differences in the composition of that compensation package reflect the needs and circumstances of the individuals offering labor services.

A mandate—such as the proposed employer mandate in health reform—is imposed to alter either the level or composition of total earnings. In its most benign form the mandate merely reallocates the form of compensation. For example, attempts to artificially raise the wages paid to labor in order to increase total compensation can be expected to result in offsetting reductions in other parts of the pay package, leaving total compensation—and therefore employment—unchanged.

Yet this benign, “harmless” mandate is rarely, if ever, witnessed in practice. While many have argued publicly that the costs of a mandate can be shifted back onto wages or other benefits, this view is not entirely accurate. In most cases, the effect of a mandate will be to both raise employer costs and simultaneously reduce wages, resulting ultimately in a decline in employment.

If employers are required by law to pay for health insurance benefits, they will of course attempt to shrink cash wages (or some other component of the compensation package) by the full cost of the mandate. But employers only will be successful in fully shifting this mandated cost if their workers are indifferent to the level of their cash wages. However, workers do care about the cash wages they receive, and as those cash wages are reduced an increasing number of them will find alternatives outside the labor market. To retain the needed number of workers employers will be forced to absorb some of the mandated cost and therefore operate with higher total labor costs. Costs which have not been shifted will be regained by downward adjustments in employment levels.

Why are some workers uninsured today? In harsh economic terms it is because they perceive less value in paying to acquire the benefit of insurance than in keeping the money in their pockets—using it to put food on their dinner table for example. Effectively they perceive the value of cash to be greater than the insurance they could buy. It is these discrepancies in perceived values which most often lead low skilled and low paid workers to opt out of the employer-sponsored benefit. This is a perception that will remain unchanged unless their income rises. If an increase in their income is the ultimate goal of health reform, we must re-evaluate our assumptions about mandates. WE must be ready to accept the more limited employment opportunities that inevitably accompany higher compensation costs.

This will have dire consequences for unskilled workers. Under a mandate they will be forced to produce more in order to afford the benefits we want them to have, since the mandate effectively increases the minimum level of skills one is allowed to offer in the labor market. At the same time, the number of jobs for which they are qualified is greatly diminished. In the end, the “free” insurance they are supposed to receive from their employers comes at a very high price.

Overall, Dr. Rottenberg’s assessment mandates clearly indicates the need for an honest appraisal of our actions in mandating health insurance. A mandate is an effective hike in total compensation and we must address the employment consequences of that policy.