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A great deal of support for National Health Care is coming from a variety of interests that claim getting workers off of employer health plans and onto the government dole will improve the competitiveness of American firms. This is because it is argued that firms would have lower labor costs and would be able to charge lower prices. Since firms are being greedy, they would have no incentive to raise their workers’ wages to reflect this change. But firms pay workers whatever they can to induce them to come, so if they are not paying health benefits, surely they will increase wages, no? Empirical evidence on payroll tax incidence confirms that this is, in fact, how firms would respond. In other words, even though “half” of the payroll tax is nominally borne by firms, virtually all of the 15.3% of the payroll tax rate is borne by workers. Thus, if the “employer” portion of the payroll tax were eliminated, then most of that difference would be received in the form of higher wages for workers. What is different about any other cost that employers bear? Nothing.

Compensation is set in competitive markets. Arguing that firm costs would fall if they were able to offload health care costs on the taxpayers is the same as arguing that worker compensation would fall if firms did not offer health insurance to their employees. But this is simply nonsense. Firms will compensate workers up to the amount that they are worth to the firm – and by not have firms pay health care costs, it does not diminish the value that workers can provide for firms. In fact, if the fascist health fanatics are right, workers will become more productive, and therefore more valuable to firms – which would lead to sharp compensation gains. The point is, if firms do not need to use health benefits to attract workers, then they will use some other form of compensation, presumably more expensive for them (health benefits receive favorable tax treatment), possibly wages or other non-wage benefits.

If everything about workers remains the same, firms would need to offer the same amount of compensation as before to encourage folks to work for them. At best, the new compensation would cost the firm no less than health insurance does. How would workers respond to the offloading of health insurance (of similar quality, for argument’s sake) to the taxpayers? Ignoring the fact that they would have to pay for this somehow (they do, there are not enough “rich” people to foot the bill), having the same compensation paid by your employer, but also getting an annual health insurance windfall from the government is like receiving additional income. When workers receive additional income (non-wage), it encourages them o purchase more of everything, including leisure. Workers would therefore be inclined to wish to work less. If this leads to a substantial decrease in labor supply, then firms would be forced to bid up compensation even higher in order to attract their desired quantity of workers. How will that affect the competitiveness of American firms?

At this point it would be useful to ask yourself – if workers can be made better off by offloading health care costs from firms and onto the government hands, why not have the government take over the burden of every cost for firms – including wages? Wouldn’t that make workers infinitely better off? Wouldn’t that relieve firms of the burden of having to compete for workers at all? How would that affect the competitiveness of American firms?

The absurdity of the foregoing paragraph would be lost on someone who believes that firms actually have the ability to pay workers more, but are just not sharing enough with them now. Are there circumstances when firms are not paying workers what they are (marginally) worth? Sure, but the frictions that give rise to such occurrences are neither widespread nor stable (so that other competitive firms could take advantage of these frictions).

Finally, I ask a rhetorical question: how do you think politicians would respond to both workers and firms when they observe wages rising after the government takes care of the health care expenses for American workers?

One Response to “They Can, They Just Choose Not to Share”

  1. Harry says:

    “[H]ow do you think politicians would respond to both workers and firms when they observe wages rising after the government takes care of the health care expenses for American workers?”

    Wintercow cleverly qualified his question as rhetorical.

    The politicians, who are the government, almost all the time think that they do take care of health care, as if it is their own money.

    One of the fundamental problems is you never know how they will respond. When one has one’s own money at risk, the safest bet is to
    expect politicians to make a mess.

    Suppose you owned a failing business with a lot of debt, and you found out you could sell it to your friend, and told your friend he could own it unencumbered with that debt, screw all of your creditors and don’t worry about the sting of bankruptcy. The only catch is that your friend has to produce two million buggy whips per year, and fifty million high-button shoes, and if he does not, he will be read his Miranda rights and surely will be sent to Attica.

    A rhetorical question: How would your friend, if he were not a politician , respond?

    I’d really like to hear Speedmaster’s comments on this, as well as Wintercow’s.

    I do not think Dick Durbin EVER would know whether wages are rising or falling, unless a staffer told him that wages were falling, in which case he would blame it on Nixon or Bush (some logic there) or Ronald Reagan.

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