Cross-Employee Redistribution Effects of Mandated Employee Benefits

Abstract

Whether mandated employee benefit policies are efficient, depends on the ratio of aggregate value attached by employees to the benefit, compared to the aggregate employer cost of providing the benefit. The higher the aggregate value/cost ratio is, the stronger is the justification for implementing the policy. High value/cost ratios are indicative of the existence of market failures in the voluntary provision of the benefit. Mandated benefits, efficient or not, do not entail employer-employee redistributive outcomes. The fact that no employment rate changes can be traced following the enforcement of a mandate program is usually indicative of full employer cost shifting. Policy makers treat the magnitude of cost shifting, as a proxy of the value workers place on the benefit, disregarding the fact that full cost shifting can also result from the inelasticity of labor supply. When inelasticity of labor supply is responsible for full shifting of the costs of the mandate, workers are simply carrying the dead weight cost of the mandate. From an intra-employee perspective, it seems that the public is mainly concerned whether mandates are increasing the unemployment rate. This is true of the minimum wage discourse and the discussions pertaining to the prospects of mandatory employer-provided health insurance. Again, it is assumed that if employment rates are unharmed, the mandate is efficient and equitable since employees are financing the cost of the benefit through decreased wages (health insurance) or increased productivity (minimum wage). The fact that employers do not respond to mandates by decreasing total demand for labor, does not out rule intra-employee redistribution. Mandated benefit schemes, similar to voluntary benefit schemes, reinforce dual labor market practices, in which exempt employees are financing to some extent the costs of providing the benefit to covered employees. This structure of cross-subsidy is efficient from the employer's perspective. It raises productivity and commitment on the part of internal workers. However, it increases compensation disparity between internal and external labor market employees.