Tyler Cowen asks what is wrong with the labor market. He points to David Leonhardt, who writes,
the downturn has still exacted a much harsher toll on the less educated. The unemployment rate for college graduates is still just 4.5 percent, and the gap between their pay and everyone else’s is larger than it has ever been. For most college graduates, the Great Recession has not lived up to its name.
Health care now approaches 20 percent of the economy. With health insurance included in compensation, that means that 20 percent of compensation is determined not by your skill level, but by the median cost of health insurance. If the value of your skills has been rising faster than the median, then maybe that is not a problem. However, if the value of your skills has been rising more slowly than the median, then your skill level is no longer enough to overcome the health insurance hurdle.
Let the worker’s subjective valuation of health insurance equal V. Let the cost of health insurance equal C. Let the marginal product of labor equal M. Let the opportunity cost of the worker’s time equal W. Then we have:
M – C ?= W – V
The worker takes the job if and only if the left-hand side exceeds the right-hand side. If the excess of the worker’s marginal product over the cost of health insurance is not greater than the worker’s take-home wage requirement less the worker’s subjective valuation of health insurance, then the worker will not be employed. That may be what we are seeing today.
For example, suppose that your marginal product is $25,000, but the cost of employer-paid health insurance is $15,000. The means that the employer can only afford to give you pay net of health insurance costs of $10,000. Suppose that you would not pay more than $5,000 for health insurance if you paid for it yourself. Then the value of the job to you is $10,000 + $5,000 = $15,000. If you value your time at more than $15,000, then you will not take the job.
It is not that the marginal product of workers is close to zero. It is that the marginal product of workers is close to the median cost of health insurance, and workers do not value health insurance that highly.
[UPDATE: Nice sentences from Steven Horvitz:
What exactly government is supposed to do to “directly employ” unemployed folks with these highly specific skills? I really am waiting for someone to argue government should pay them to build websites and databases and then just delete what they’ve done.]
READER COMMENTS
Tyler Cowen
Aug 11 2010 at 9:12am
I agree, but keep in mind the ZeroMP hypothesis is specified to be net of such costs…
floccina
Aug 11 2010 at 10:08am
But unemployment is higher among the young too and they do not need health insurance and health insurance for them is cheap.
Arnold Kling
Aug 11 2010 at 10:33am
Floccina,
Whether young people need it or not, and whether health insurance is cheap or not, if a large firm hires them, it has to pay health insurance costs at the median rate.
Hyena
Aug 11 2010 at 10:33am
This seems an unlikely reason. Far fewer of these people would have qualified for health insurance anyhow, if only because many work part time.
Your model assumes that most or all of these workers have to be provided with health insurance. That may not be so, and probably isn’t, thus there isn’t a lot of reason to believe there is a “health insurance hurdle”.
Mike
Aug 11 2010 at 10:39am
I think Arnold’s point still holds. At a larger company, the difference in marginal cost of the health insurance plan for adding one more employee is the same regardless if the next person hired is an overweight 50 year old, or a trim and fit 25 year old.
Mike
Aug 11 2010 at 10:40am
Duh! Too slow!
Mark
Aug 11 2010 at 11:14am
I just assume a lot of the younger workers I work with opt out of the company’s health insurance program. We had a 4 percent company match on our 401k but I suspect 50 to 75 percent of the workers I work with didn’t match it at all. Of course no one matched it when the company dropped their contribution at the bottom of the bear market. The company regularly offers unpaid furloughs for its hourly workers(not the higher paid salary workers) that are usually accepted with enough enthusiasm that forced time off(only for hourly workers) rarely occurs. This also reduces the amount of vacation time those worker are getting. Maybe my experience is just out of ordinary but the young low skilled workers I work with are offering quite a bit of bang for the few bucks they receive.
Dan Weber
Aug 11 2010 at 12:50pm
Whether young people need it or not, and whether health insurance is cheap or not, if a large firm hires them, it has to pay health insurance costs at the median rate.
This is not my experience, although others can post their own. The health care expense forms I’ve seen break out how many of each employee is in each 5- or 10-year age bracket, and they pay based on that.
Paying on the median, as opposed to the average, would open up some interesting arbitrage opportunities. It the average age is 40 then the 41-year-old costs as much as the 71-year-old.
travis
Aug 11 2010 at 9:42pm
HorWitz.
Brian Clendinen
Aug 12 2010 at 10:15am
@Dan Weber
This might be true but it does not mean individuals are actually hired based on this. It depends on the companies Cost Accounting Method. One would have to due a survey but I believe most managers only get the average health cost per employee allocated to their fringe Benefit category, even if the company pays more for the older workers.
Therefore, because their department budget does not increase or decrease based on what one pays for health insurance they due not take that into consideration. This is assuming an individuals medical benefits is calculated at a fixed rate. In most companies managers look at an individuals cost via a fringe benefit wrap rate of between 20% and 35%. So all benefits are put in a bucket then allocated to the departments base salary. So a manager is actually using a % of base salary not actual fixed + variable cost per employee when looking at an individuals cost.
The primary reason companies due not allocate actually medical cost to each individual is the cost of doing this. Legal issues might also come into play also because the cost might actually be worth it now days.
Actually a change in tax law could actually force business to allocate actual cost to each employee. I think all fringe benefits should be taxed including FICA. That way people would really know how much they make and how much their company really spends on them. Secondly, if you have to pay taxes on it and you are seeing it every week on your pay check, that education alone would cause a drastic political changes. About the only tax increase I have ever thought is a good idea.
Jacob
Aug 12 2010 at 1:19pm
JM Keynes:
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Houses, databases, shovelled rubbish, whatever boosts employment boosts aggregate demand, then incomes, and then employment again, and so on… and that’s how multipliers are born.
John R. Graham
Aug 12 2010 at 1:56pm
I’m a huge fan of Arnold Kling, but I don’t quite buy this argument. Until 2014, employers in most states outside Massachusetts or Hawaii do not have to offer health benefits.
Health benefits are “all or nothing” offerings to full-time employees (i.e. if employer offers benefits to a class of employee he must offer it to all employees in that class), but employers can incorporate tactically so that the low earners are in a firm with no benefits. Many low-income workers have no health benefits.
I think the old observation that unskilled labor is performed in Asia is a more significant factor in unemployment of low-skilled persons in the U.S.
Colin K
Aug 12 2010 at 6:44pm
IIRC a lot of insurance group plans have a requirement that the employer offer any employee the opportunity to enroll–they can’t decide one day to hire this one guy but not offer him health insurance. So I suspect a lot of companies are constrained somewhat in their choices.
At the same time, Massachusetts’ unemployment rate is somewhat below the national average right now. That has not always been the case, as the state recovered from the dot-com and 9/11 recession more slowly than the nation as a whole. But Mass. is also one of the wealthiest states, so maybe without Romneycare we’d be doing even better than we are.
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