Current Events Health Insurance Public Policy

Economics of “Pay or Play” Mandates

Many of the Democratic candidates support having employers provide insurance for their employees with the threat of a fine or tax if an employer decides not to comply. This of course will increase the cost of an employee for firms. If employees truly value the health insurance, then the cost of insurance can be passed on to the employee through lower wages.

This cannot happen, however, if you are a low-wage worker whose wage is at or near the minimum wage. This is, of course, because employers can not pay wages below the minimum. Thus, a “Pay or Play” mandate may reduce employment for the lowest skilled workers. A paper by Baicker and Levy examines this issue.

The authors find the following:

“The authors calculate the average cost of a health insurance plan to be about $9,000 for family coverage during their sample period, or $3.66 per hour for a full-time worker. Assuming that a mandate required employers to provide coverage similar to the average plan and to pay 80 percent of premiums, wages would need to fall by $3 per hour to fully offset the cost of the mandate.

The authors estimate that one-third of all uninsured workers, or 5.5 million U.S. private sector workers, have earnings within $3 of the minimum wage.

…the authors estimate that the implied increase in compensation resulting from the mandate would cause 224,000 workers to lose their jobs. The affected workers would be disproportionately low education, minority, and female.”

From the NBER Fall 2007 Bulletin on Aging and Health.