Academic journal article NBER Reporter

The Financing Costs and Insurance Benefits of Social Insurance Programs

Academic journal article NBER Reporter

The Financing Costs and Insurance Benefits of Social Insurance Programs

Article excerpt

One of the most important trends in government activity over the past 30 years is the increase in the share of the government budget devoted to social insurance programs, including Social Security, Medicare, Unemployment Insurance, and Medicaid. At the federal level, spending on social insurance programs has grown from 13.5 percent of the budget in 1960 to 36.8 percent in 1993. This rapid growth in spending has been paralleled by increased economic research on the effect of social insurance programs on economic behavior. This research has focused primarily on the costs of these government interventions, through distortions to individual and firm decisionmaking. But there are two further important questions about social insurance programs that have remained relatively unexplored. First, what is the effect of different ways of financing social insurance interventions? Second, what are the benefits of these interventions? My research over the past several years has been devoted to addressing these questions.

Financing Costs

Employer Mandates

There are three primary alternatives for financing interventions designed to increase access to insurance for adverse events: providing the insurance publicly, and financing the provision through increased general taxation; subsidizing the individual purchase of the insurance; and mandating that employers provide the insurance to their workers. The last of these approaches, employer mandates, is particularly attractive to governments as a means of financing social insurance interventions in this era of tight fiscal budget constraints. The U.S. government over the last century has mandated that employers provide workers' compensation coverage to insure workers against workplace injury, offer (unpaid) maternity leave to employees, and pay a minimum hourly wage. And the central feature of the recent Clinton health care reform proposal was employer-mandated provision of health insurance to employees.

A key question about employer mandates is whether they will raise the cost of labor, and thereby lead to layoffs and unemployment. Since workers are getting a valuable benefit at the workplace, such as health insurance, they will be willing to work for a lower wage. In the extreme case in which workers value this benefit at its cost to their employers, then they will work for the same amount of total compensation, with their wages falling to fully offset the cost of the insurance. In this case, mandates will have no effects on employment. Thus, the extent to which the cost of mandated health insurance is shifted to wages is a central question for evaluating the effects of this means of financing government interventions.

Two of my research projects have attempted to answer this question by evaluating the prior experience of the United States with large mandated employer benefits. In the first,[1] I examine the effect of several state and federal laws that mandated the provision of comprehensive coverage for childbirth in employer-provided health insurance plans. These laws raised the costs of employing women of childbearing age, as well as their husbands who covered them in their health insurance plans. I find that the increased insurance costs were shifted fully to these workers' wages, with no effect on total labor supply. As would be expected with a mandate that costs a fixed amount per worker, there was some increase in hours and reduction in employment, but the net of the two remained constant.

In the second,[2] Alan B. Krueger and I study the effects of increases in the cost of workers' compensation insurance, the oldest and largest mandated benefit in the United States. Workers' compensation costs rose dramatically in the 1980s, because of rising medical costs and increased generosity of state legislatures (which set the benefit levels); in some industries, costs rose by over 10 percent of payroll, and by 1987 were as high as 25 percent of payroll. …

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