ObamaCare will Make Employees and Employers Worse Off

While Americans are reckoning the financial impact of President Obama’s healthcare reform initiative on the economy as a whole and on them personally, some of its obvious consequences for labor markets thus far seem to have escaped notice.

In a freely functioning marketplace, the compensation of employees consists of a mix of wages or salaries and “fringe” benefits. The compensation package varies from industry to industry and employer to employer, but in addition to an hourly wage or an annual salary it may include things such as on-the-job training, safety programs that reduce the risk of job-related injuries, paid vacations, time off for federal holidays, short workdays on Christmas and New Year’s Eve, flexible schedules – and health insurance.

All elements of an employee’s compensation package are substitutes for one another. Everything else being the same, an employer who provides a safe and pleasant working environment can offer a lower wage than one whose workplace exposes employees to toxic substances or requires them to perform unpleasant duties. To paraphrase Adam Smith, the job of public executioner is, in proportion to the work done, better paid than any common trade whatever. Economists call such tradeoffs “compensating wage differentials”.

More to the point, employer-paid health insurance became widespread during the Second World War when government-imposed wage and price controls prevented business owners from either hiring or retaining productive employees by raising their pay. Adding health insurance to workers’ compensation packages was doubly advantageous because the benefit was tax-free to employees and employers could lower their own tax bills by deducting from gross income the expense of providing it.

The arrival of ObamaCare means that many businesses no longer will be free to tailor compensation packages optimally. Any company employing 50 or more workers must from now on provide a group health insurance policy whose coverage is not too generous, but that also meet minimum standards to be dictated from Washington. (Depending on the relative lobbying strengths of various healthcare-related special-interest groups, the federal standards may require reimbursement for bariatric surgery, fertility treatments, restless-leg syndrome as well as other exotic – and expensive – health problems.)

ObamaCare’s health-insurance mandate forces employers who do not currently offer that benefit to do so, but it does nothing to make employees worth more to them. In order to hold the cost of compensation constant, profit-maximizing employers may cut workers’ pay or require them to pick up the tab for some or all of their insurance premiums. They might reduce fringes on other margins, such as no longer footing the bill for job-skill acquisition, shortening times for lunch and annual vacations, eliminating scheduled coffee breaks and (Bah, humbug!) making them work on Christmas Eve.

The costs of the mandate will fall most heavily on employees now earning incomes at or near the minimum wage. Since their pay cannot be cut, some will be priced out of jobs altogether if their employer also is required to provide health insurance for them.

Employees – especially younger workers in good health – likewise will be prevented from choosing jobs that pay high wages but do not offer a health insurance benefit they often rationally do not value highly. And they will be forced to pay for coverages they do not need and for which they otherwise would not be willing to pay.

The compensation package heretofore determined in a competitive labor market has resulted from mutually agreeable bargains between employers and employees. Depending on worker preferences over wage and non-wage benefits, employers had incentive to offer mixes of the two that allowed them, at least cost, to attract and retain people in the numbers and skills of which maximized their profits.

At least one element of that package – health insurance – no longer will be subject to negotiation. Labor markets accordingly will be less able to match workers with jobs efficiently. Both therefore will be made worse off. We can thus expect permanently higher unemployment rates and an economy that is less able to adapt to the socialist policy initiatives that still loom on the Obama administration’s agenda.