Health Care Costs Crippling U.S. Business?
CBO director Douglas W. Elmendorf explained this last week to the Senate Committee on Finance, which is chaired by Max Baucus, a leading proponent of government health care. The point is that for employers, health care is merely a part of total compensation: It reduces cash compensation for employees but it does not increase costs of employment. To argue otherwise is to argue for lower total U.S. compensation — that is, lower wages for U.S. workers. Said Mr. Elmendorf, “the costs of providing health insurance to their workers are not a competitive disadvantage to U.S.-based firms.”
This is somewhat cryptic, in my view. What employers ultimately care about in hiring a worker is the total cost of hiring that worker. They don’t, for instance, look simply at the wage and ignore the costs of benefits. Employers look at all costs. If labor markets are competitive and there were no taxes on labor income then workers would likely rather receive their “health care benefits” as wages instead of benefits and then go out and purchase their own health care. Think of it this way, if a worker is paid $25,000 and then goes out and buys $1,500 worth of health insurance, or the employer pays the worker $23,500 and provides a $1,500 of health insurance the worker is indifferent between the two. Now if there are taxes and health benefits provided by the employer are given special tax treatment then the worker would prefer the option with benefits. But note, that the employer incurs the same total costs of employing the worker. Thus, the notion that health care benefits and the rapid rise in health care costs is a competitive disadvantage to the employer would also be true if it were rapidly rising wages and not health care benefits.
Somehow I don’t think those making the competitive disadvantage argument of health benefits would make the same argument about wages, but the logic is essentially the same.