In many cases, the government will mandate that employers provide benefits in lieu of having the government provide the benefit themselves. One example is that the U.S. government mandates that firms purchase Worker’s Compensation insurance. Are these mandated benefits a more or less effective form of social insurance than direct government provision?
Summers (1989) claims that in certain cases, the mandated benefits are welfare improving in comparison to public provision. There are two main reasons for this. First, compelling employers to provide a benefit gives workers a wider choice of benefits–through worker choice of employer or employer-employee negotiation–than if a program was administered by the government. Secondly, the mandated benefits may result in a lower deadweight loss than if the government imposed a general tax and used the funds to finance the benefit. For instance, mandated workers compensation may reduce labor demand by firms (since this is an added cost), but may increase labor supply by workers if they want the benefit. If employees value the benefit at cost, the resulting equilibrium will result in the same level of employment but with the full cost reflected in a lower wages. On the other hand, workers generally do not increase labor supply in response to general taxes to fund public programs since they do not see a direct link between the tax and any benefit they may receive.
Gruber (1994) tests whether or not mandated maternity benefits are captured in lower wages for the affected group. The author claims that if there is not a shifting of the maternity insurance cost to employees, either the employees do not value the benefit or there are wage rigidities impeding wage reductions. He uses variation in state laws between 1975 and 1978 as well as the Pregnancy Discrimination Act (PDA) passed in 1978 by the federal government to identify any wage reduction. A difference-in-difference-in-difference (DDD) is used where the treatment group are married females between 20 and 40 years of age, and the control group is made up of all individuals over 40 years old as well as single males between 20 and 40 years old. Gruber estimates the before and after impact of state and federal laws on these two groups. He then compares the DD results between states where the laws were passed and states where no law was passed to calculate the DDD estimate. Employing a variety of specifications, Gruber finds that the cost of the mandated maternity benefit is fully reflected in lower wages for the ‘treatment’ groups. If we extrapolate this to a proposal which would mandate provision of health insurance by employers, one would expect the cost of the mandated health insurance to be fully reflected in lower wages.
Summers (1989) does note that there are a few problems with mandated benefits. First, they only help those who are employed. Secondly, if there are wage rigidities, then the cost of the benefit can not be reflected in wages and thus, unemployment may result. Finally, with mandated benefits the government is not able to pursue redistributional goals.
Summers (1989), “Some simple economics of mandated benefits,” American Economic Review, 79, pp. 177-184.
Gruber (1994), “The incidence of mandated maternity benefits,” American Economic Review, 84(3), pp. 622-641.