November 22, 2010
Undoing Benefits to Undercut Unemployment — Alliteration and a solution to persistent high unemployment
America is famous for having one of the most powerful and productive workforces on the planet, yet getting them back to work seems to be one of the most difficult tasks faced by the Obama administration. The president is under tremendous pressure from all sides to lower the national unemployment rate, which has stubbornly hovered right around ten percent despite the administrations best efforts. This due partly due to the fact that unemployment is a trailing economic indicator, in the regard that it doesn’t drop until well after a recovery is underway. But, technically the American economy has been out of recession for months. Could it be because the federal government can only do so much to stimulate the economy? Sure, but again only to a small degree. And even if this argument were causative, it too is undermined by the fact that a recovery is indeed underway.
So if these two ideas don’t explain why so many Americans can’t find a job, what does? Simply, it’s too expensive for companies to hire workers. There’s no way around it. Every other explanation falls short of explaining why nearly ten percent of workers can’t find jobs that should be easy to come by. The vast majority of these individuals are even educated and experienced. Retraining isn’t the answer here and neither is extending unemployment benefits so the unemployed have more time to search. Rather, we have to make workers cheaper to hire so companies have more reason to do so. How? By suspending or terminating mandatory benefits legislation.
The nuts and bolts of this proposition are founded in the economic forces that drive labor markets. Firms hire a worker based on Marginal Value Product, or MVP. This is determined by subtracting the costs of hiring a worker from the expected value of their output. When governments, federal and state governments both mandate benefits, place restrictions on hiring a worker, such as mandatory health insurance, this MVP is sharply reduced. Instead of being able to reap the full benefits of a workers’ productivity, the company is now forced to pay into the employee’s insurance plan. This cuts into the value of the worker as well as the firm’s profits.
Benefits are good, don’t get me wrong. But, when a firm is forced to provide heaps of benefits to relatively unskilled workers, it’s no longer worth the companies while to hire that person. When you have to give executive caliber benefits, such as comprehensive health, vision, and dental insurance, subsidized maternity leave, paid vacation, stock options, profit sharing, and a slew of travel benefits, to middle management employees it’s just a losing proposition. I’m going to call a spade a spade here and say that a middle manager isn’t as productive as a high level executive, at least in terms of adding value to a company. So, logically, the company can’t afford to pay them the same benefits. The above example is admittedly extreme, but it serves to illustrate the problem of states mandating benefits above an employees pay grade. When this happens, firms either don’t hire people or outsource to a state or country where these benefits aren’t mandated and it’s cheaper to hire the labor they need to stay afloat.
As the economy continues to stumble, and make no mistake major industries aren’t out of the woods yet, companies are under heavier pressure than ever to cut costs and remain profitable. So, the demand for American labor has dropped sharply due in no small part to the fact that American labor is expensive. Let’s face it, when all you need is for some guy to weld a car frame or a person to supervise a call center, you don’t need the most qualified and experienced worker out there. You need one who will give you the most bang for your buck, and right now that isn’t an American.
This problem threatens to get worse as the government is mulling reducing the tax credit it gives to employers to provide health insurance to workers. As these benefits become mandatory in more states, it will become even more expensive to hire and more Americans will find it even more difficult to secure the work they need. If the requirement for benefits were lifted, this problem would be more or less solved because firms would be able to hire workers at their true value instead of having this value tampered with by mandatory benefits.
Now, I know what you’re thinking right now: “if we don’t mandate that companies provide benefits to workers, they won’t.” Simply: wrong. I can’t deny that the ranks of the uninsured and unbeneiftted will increase, but benefits will still be awarded to workers either willing to take the pay cut or productive enough that the company can afford to pay them the benefits they want. If benefits aren’t a given, we will see more qualified and experienced workers moving through job markets as they now have another variable to consider in their hiring process. In addition to the traditional salary, workers will now be able to negotiate based on benefits. The unemployed can drastically increase their likelihood of being hired by taking cuts to benefits that their contemporaries demand. However, the reverse is also true. If a worker is especially qualified or experienced, they will likely be able to secure above average benefits for themselves and family. I’m not professing that this market allocation of employee benefits will be perfect, but it will ensure that more people are employed. With that in mind, I ask you: what’s better, one person out of five being employed and insured, three of five being employed at lower insurance, or full employment and workers being left to negotiate their benefits themselves?
By lowering the threshold of mandatory benefits for workers, or even outright eliminating the legislation, the federal government can make a major dent in the continual problem of unemployment. American labor is incredibly productive, but it’s becoming prohibitively expensive to hire, especially in blue collar and mid level fields. If the US is to remain competitive in these labor markets, we need to trust the workers to negotiate their own benefits packages. If each worker is allowed to sell their labor for what they think it’s worth, instead of what the government thinks its worth, it will lead to higher levels of employment as workers who are willing to sell labor below the mandated price/benefit level are able to do so and those who aren’t are more free to negotiate.
This solution isn’t perfect, nor do I profess it to be. But, it’s grounded and proven in economics that it will work. It’s a drastic step to be sure, but in order to finally end the deepest and most damaging recession since the Great Depression, desperate times call for drastic measures.
Brennan Morris said,
November 22, 2010 at 10:54 pm
Overall I approve!
Obviously eliminating mandatory benefits would help a corporate bottom line. However, since America has an employee based health care system most of the people who are kicked off corporate scemes (which you agree will happen relative to current levels) wont have anywhere else to turn unless they get a private plan, which are naturally very expensive and often exclusive.
So i’m curious… what are your thoughts on reducing the insurance premium burden on those who are not able to secure a corporate plan? Do you think we could have a system of tax credits? For instance, if a person is employed but not insured through the company – and is salaried in the 28% tax bracket they would get, say, a $3000 tax credit to offset the cost of private insurance. Mabye this should be a progressive credit system, wherein an uninsured employed individual in the 10% tax bracket may get a $5000 tax credit, since they would have similar medical needs but naturally less income spend on health insurance. Thoughts?
Also, if we dont have mandatory corporate benefits do you think health insurance premium inflation will increase or decrease?
novamerica said,
November 23, 2010 at 3:17 am
Assuming I understand what you’re saying, an insurance-premium tax credit would be an effective tool to encourage people to get private health insurance. The thing is, and I’ll probably write about this later, the vast majority of Americans only need catastrophic health coverage instead of what amounts to subsidized physical exams. A catastrophic coverage plan is a good deal cheaper because it only insures against things an individual wouldn’t be able to readily pay themselves if uninsured, such as a severe infection, cancer, or injuries sustained as part of an accident.
Easing of mandatory benefits will result in a decrease of premiums because when fewer people are insured, the aggregate level of payout drops and the level of risk in the pool of people in the insurance pool also drops. My two cents anyway.
William Strong said,
November 23, 2010 at 5:00 am
Hey,
Is there a way to follow your blog on twitter or something?
Thanks