Why Health Costs Make American Workers Less Competitive

Greg Mankiw likes linking to this analysis (PDF) of employer-provided health coverage from CBO's Doug Elmendorf, in which it is said:

[T]he costs of providing health insurance to their workers are not a competitive disadvantage for U.S.-based firms.

He's done it before, and he does it again today. His goal is to demonstrate that the market sets total compensation levels, such that larger employer benefits must be accompanied by wage reductions, other things equal. Removing the burden of paying for insurance from employers would result in wage increases, leading to no net change in compensation, and therefore no net change in "competitiveness" relative to workers abroad.


In the world of clean economic models this is true, but in the real world it leaves of a lot of important caveats unmentioned. One is that foreign health systems may be (and in fact frequently are) better at containing health care costs. An employer-based system in which health insurance occupies an ever larger share of compensation is problematic in a lot of ways. When costs grow large enough, firms will find themselves needing to axe either workers or health benefits. In either case, it's not hard to imagine how economic performance might suffer, in an absolute sense and relative to other economies.

But another issue may be more important; employer-provided insurance makes it much more difficult to change jobs. Jonathan Gruber reports:

Over the past fifteen years, dozens of studies have documented the detrimental impact that job lock has on the economy. These studies typically compare the mobility of workers who are at firms with insurance but do not have an alternative source of coverage (such as spousal insurance or COBRA continuation coverage) to those who do have an alternative source of coverage should they leave the firm. The studies find that mobility is much higher when workers do not have to fear losing coverage; job-to-job mobility is estimated to increase by as much as 25 percent when alternative group coverage is available.

This negatively effects entrepreneurship, as Gruber notes. It also gives employers added bargaining power in contractual negotiations, and reduces labor market efficiency and worker happiness. Economists love to talk about how labor market rigidities in Europe (read: unions) reduce economic performance. Perhaps, but on this score, the Europeans have us licked.

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Ryan Avent is The Economist's economics correspondent and the primary contributor to Free Exchange, an economics blog

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