Friday, December 18, 2009

Job-killing Health Care Reform

Job-killing Health Care Reform

Eric Staib, writing in The Free Market magazine, calls Obamacare what it is, a new "tax" on labor that will lead to increasing levels of unemployment and lower net earnings for employees all across the U.S.

"According to pages 269-273 of the [present version of the] bill, employers of full-time workers will be required to cover at least 72.5 percent of the premium of the least expensive health-insurance plan available that fulfills the bill's minimum criteria of 'acceptable coverage.' In cases in which family coverage is provided, 62.5 percent of the premium is to be borne by the employer," reports Staib. "Depending on the specific plan and other variables such as location, this amounts to a direct labor tax of approximately $300 per month for an individual, or nearly $700 for family coverage."

When a company hires an employee, they negotiate a pay arrangement in which the value of the employee's efforts on behalf of the firm must meet or exceed the amount of money paid out by the firm to retain the employee. In the final analysis, it makes no difference to the employer whether some of the money, all of the money, or none of the money paid out actually ends up in the employee's hands. Consider the following scenarios:

Expense Category
No. 1
No. 2
No. 3
Base Wages
$ 1,733
$ 1,433
$ 1,033
Employer-paid Taxes
$ 133
$ 133
$ 133
Cost of Fringe Benefits
$ 43
$ 343
$ 743
Cost of Training
$ 26
$ 26
$ 26
Cost of Safety Equipment
$ 6
$ 6
$ 6
Other Costs
$ 67
$ 67
$ 67
Monthly Cost of Employee
$ 2,008
$ 2,008
$ 2,008

In these scenarios, we are considering an employee that is worth at least $2,008 per month to his present employer. In the scenarios 1, 2, and 3, the only two factors that change are 1) Cost of Fringe Benefits (e.g., adding in mandated health-care insurance coverage costs) and 2) Base Wages (which are adjusted downward so that the "Monthly Cost of Employee" remains steady.

Scenario No. 2 represents the addition of $300 per month in individual health-care coverage costs. The increase in fringe benefits costs for this typical $10-per-hour employee from $43 per month to $343 per month calculates to almost 700% (698%). For the employer to stay par on the total cost of this employee, the employee's wages would have to drop from $10-per-hour to $8.27-per-hour, a decrease of 17%.

Scenario No. 3 looks at the addition of $700 per month in family health-care coverage as mandated under the Obamacare legislation. Adding in this $700 per month in fringe benefits (really, a "tax", since it will be mandated by the federal government) is a leap of more than 1600% (1628%) in the cost of fringe benefits for this employer. Again, for the employer to stay at par (i.e., the total cost of the employee remaining at $2,008 per month), the employee's wages would have to be slashed 40%, from his or her current $10-per-hour to $5.96-per-hour.

Most rational employers know that an employee that is presently making $10-per-hour is not likely to accept a 17% pay-cut simply because of this new government mandate, the likely outcome is that the employer will lay off the present employee and hire two or more part-time employees not covered under the Obamacare mandated "tax." In the alternative, the employer may lay off the existing $10-per-hour employee and seek to hire a replacement employee that is willing to work for $8.27-per-hour or less but still deliver at least $2,008 in value to the business. A third choice would be for the employer to simply lay off some of its $10-per-hour employees and try to make the remaining employees simply produce at higher levels. If all three of these options fail to sustain profitability in the firm, the employer will ultimately be forced to close its doors and lay off all of its employees.

Under any of these options, real wages in the U.S. economy will plummet and unemployment level will dramatically increase (at least for full-time workers). This is just bad economic policy.

Works Cited

Staib, Eric M. "The Health-Care Tax." The Free Market, December 2009: 1-3.

©2009 Richard D. Cushing


Greg Satell said...

This comment has nothing to do with you article, just as your comments had nothing to do with mine.

We have different types of market models in Economics. Some, like Oligopoly and Monopoly show imperfect competition.

Others, called perfect competition models, show no market distortions. Market distortions such as economic rents are not present in perfect markets.

This is an example of a tautology. Something, that is true, by definition.

So your "argument" is not really an argument at all.

Moreover, it makes no sense to talk about a world in which there is no regulation or coercion (by way of physical means, litigation, market based threats, collusion, etc.) That is the world we live in.

I should know, as someone who has run and consulted for companies with a market capitalization in excess of $100 million dollars, I'm an enthusiastic seeker of rents myself.

Some markets are better functioning, other markets are worse functioning. Some of us live in a comfortable cocoon, some of us live in the real world where war, revolution and mafia rule are things we have to concern ourselves with.

In this world, we do not have the benefit of the protected life you enjoy in Minnesota. If you would ever leave your safe little nest and do business in the real world, it would immediately become apparent what an ugly place the world can be.

So, as a US national who has worked in both environments I consider a properly functioning market to be sacrosanct and get a bit annoyed when corporations try to seek distorting regulations for themselves (As Rupert Murdoch is doing now) and draping them in "pro-business" language.

If you would like to continue this discussion, please do it on your blog and not mine.

- Greg

Greg Satell said...

What I don't like is people who refuse to add anything meaningful to the discussion and take it upon themselves to simply ask rhetorical questions rather than add anything significant.

One of the reason's my site is so popular is that it attracts intelligent comments.