October 6, 1988

October 6, 1988 | Backgrounder on Jobs, Jobs and Labor Policy

Mandated Benefits: The Hidden Tax Hike That Destroys Jobs


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675 October 6,1988 MA NDATED BENEFITS: THE HIDDEN TAXHIKE THAT DESTROYS JOBS INTRODUCTION Congress can be very creative. When taxpayers begin resisting spending, Congress finds ways of disguising the true cost of programs. One favorite method has been to move programs off budg et, so that they do not even appear in the federal budget. In this way taxpayers may be fooled into believing that these programs are free. Another means of disguising spending is for Congress to move spending into the credit portion of the budget.

By this the federal government guarantees private lending to projects or individuals, usually at below-market rates? By insuring the over $450 billion worth of private sector loans Congress has found a way to provide benefits to certain constituencies without ap p earing to spend money. Of course, loan guarantees are a commitment to spend money later if borrowers default. This is a very real and expensive possibility, as taxpayers are now discovering with the proposed $50 billion taxpayer bailout of the Federal Sav ings and Loan Insurance Corporation.

Congresss newest form of budget subterfuge is perhaps the most dangerous. This takes the form of avoiding direct federal spending by forcing business to provide the service instead, at its own cost. In each case, firms are required to give certain groups money or benefits that cannot be justified on commercial grounds. In this past session of Congress over ten separate employee mandated benefit laws have been proposed or enacted, with a total potential price tag to busi n esses of $40 billion to $120 billion a year Examples: Congress passed legislation this summer requiring businesses to provide 60 days notice to employees before closing a plant. Legislators also barely failed to enact a steep increase in the minimum wage a nd broad expansions to the Davis-Bacon Act, which 1 Thomas J. DiLorem, Putting Off-Budget Federal Spending Back On the Books, Heritage Foundation Buckgrounder No. 406, January 30,1985 2 John E. Buttarazzi, Selling the Federal Loan Portfolio, in Stephen Mo o re and Stuart M. Butler, eds AivuWon: A Smtegy for Taming the Fe&d Budget (Washington, D.C The Heritage Foundation, 1987 requires businesses winning federal contracts to pay union wages. Lawmakers ran out of time to act on the most expensive and intrusive measure of all: Senator Ted Kennedys legislation mandating employers to provide health insurance for all workers. Now in the final days of the session, the Senate appears likely to consider legislation to force companies to provide paid parental and medic a l leave to their workers. Whatever mandated benefit legislation fails this year no doubt will be a top priority when the 10lst Congress convenes in January Harming Small Businesses. The cruel trick of mandated benefits, of course, is that the true cost ul t imately is borne by consumers in the form of higher prices by workers in the form of lower wages and destroyed jobs, and by the federal Treasury in the form of reduced tax revenues from a slower growing economy. The businesses that are harmed most moreove r are small and minority-owned firms, which have been the primary job creators over the past decade.

Many legislators clearly believe that by forcing business to become a checkbook for the welfare state, they have discovered the ultimate free lunch. In tru th, Americans gain no free lunch when businesses are forced to absorb the cost of government programs Endangering 1-2 Million Jobs. The biggest loser from mandated benefit laws is the group that is supposed to be helped most: American workers. By forcing A merican firms to add billions of dollars to their labor costs, the proposed bills undermine U.S. international competitiveness and could torpedo the current economic expansion, causing a hemorrhage of American jobs. In Europe, where mandated benefits are common, jobs have not grown for nearly a decade and unemployment is at double-digit rates as mandated benefits push up the cost of labor. In the U.S an estimated one million to two million jobs would be lost if all the mandated benefit bills were enacted.

Mandating employer benefits is nothing more than a method of forcing Americans to pay indirectly for social welfare programs that they refuse to pay for directly through higher taxes. Ronald Reagan repeatedly has pledged to veto any congressional tax incr e ase Now he must declare his intention to veto any of these back door taxes that are sent to him in the final days of this session. Then next January, after Inauguration Day, the new President should warn Congress that he will veto any bill that contains s u ch a back door tax hike THE PROLIFERATION OF MANDATED EMPLOYEE BENEFITS This year more than ten separate bills were introduced in the Senate and House that would force companies to provide certain benefits to their employees? These bills comprise the bigg e st labor agenda before Congress since the New Deal. Some of these bills such as plant closing notification legislation, have already been passed. Others, such as parental leave, may yet pass Congress this session. Others still, such as minimum wage, have b een blocked or seem stalled. But even if they fail this session, the pending bills will be top priority in the new Congress 3 William H. Peterson, Six Bills Penalizing Working Americans, Heritage Foundation Issue Bullefin No. 133 October 7,1987 2 Among th e most important pending bills are 1) Parental and Medical Leave The Senate version of the Parental and Medical Leave Act requires businesses of 20 or more workers to provide employees who become parents of new-born children with 10 weeks of unpaid leave. T he bill covers fathers and mothers. Businesses also would be mandated to give seriously ill employees up to 13 weeks of unpaid leave. The Senate may vote this week on the legislation Economic Impact: Robert R. Nathan Associates, a Washington economic cons u lting firm respectedfor careful analysis, estimates the cost to businesses for added health insurance costs alone would be between $200 million and $600 million per year? The General Accounting Office places the cost at $350 million each year. The America n Society for Personnel Administration (ASPA) believes that the most significant cost to businesses of the legislation would be the expense of hiring temporary replacement workers. ASPA estimates the average cost to a business of lost productivity and the d irect expense of recruiting and training a temporary worker for a low-skilled position at about $11,200.6 2) Mandated Employee Health Care Senator Edward Kennedy, the Massachusetts Democrat, introduced legislation this year to require employers to provide employees working over 17.5 hours a week and their dependents with specified health insurance coverage. This insurance would include in-patient and out-patient care by physicians and hospitals, prenatal and baby care. Though the legislation was reported o u t of the Senate Labor and Human Resources Committee, no further action is expected this year. It is likely to be pushed hard next year by liberals in both Houses Economic Impact: Nathan Associates puts the first year cost to American business of the Kenne d y legislation at a staggering $35.8 billion ann all Office (CBO) places the cost at $27 billion per year. The Washington-based Institute for Research on the Economics of Taxation estimates that the increased insurance demfnd ignited by the bill would rais e total health insurance costs by $100.8 billion per year. This The Congressional Budget BY 4 In January 1988, Nathan Associates conducted a series of studies on the estimated cost of various mandated benefit proposals. The studies were commissioned by the National Foundation for the Study of Employment Policy. The Foundation believes that the eventual cost of these bills could be twice as high as the studies indicate 5 Robert R. Nathan Associates, The Private and Public Sector Costs of Proposed Family and M edical Leave Legislation, 1988 6 American Society for Personnel Administration, Replacement Costs and Operational Difficulty of Implementing FdyParental and Medical Leave Legislation, 1988 7 Robert R. Nathan Associates, The Private and Public Sector Costs of Proposed Mandated Health Insurance for All Workers, 1988 8 Statement of Edward M. Gramlich, Acting Director, Congressional Budget Offce, before the U.S. Senate Committee on Labor and Human Resources, November 4,1987 9 Aldona Robbins and Gary Robbins, M a ndating Health Insurance, Institute for Research on the Economics of Taxation Economic Policy Bulletin, July 1987 3 would increase the budget deficit by $35 billion a year, thanks to increased Medicaid and 8 Medicare costs sparked by a rise in medical cos t s, and would lead to the elimination of one million jobs 3) High Risk Occupational Disease Prevention This legislation would require firms to offer health monitoring and testing to current and former edployees who are, or have been, exposed to hazardous s u bstances in the work place. If the worker has suffered injury due to exposure, the employer must offer the worker a new job at the same salary level, or pay the worker his salary and medical insurance for one year. The firm would be forced to pay for thes e benefits even if the workers were fully informed of the health risk and were already compensated for this risk through a higher sa1ary:This legislation passed in the Housepbut was defeated in the,Senate Economic Impact: A Nathan Associates anal sis place s the cost to businesses of this at between 5.8 billion and $6.4 billion per year.lThe most costly feature of the legislation is anticipated litigation expenses due to liability claims. The American Society for Personnel Administration predicts that a land s lide of litigation would result if the bill were enacted into law 11 4) Anti-Double Breasting for Construction Companies Legislation introduced in the House and Senate would bar double breasting, which is the technical term describing when a construction- c ompany allows unionized firms to form nonunion affiliates to compete in local market conditions. Similarly, it means a construction firm can maintain a more costly unionized division, making it eligible for government contracts without having to pay the s ame artificially high wages throughout its operations.

The anti-double breasting bill effectively mandates union membership and union rates for much of the construction industiy. The legislation has passed the House and is pending in the Senate Economic Im pact: No studies have examined the direct costs to businesses of the legislation. But an analysis by Thompson, Mann, and Hutson, a Washington-based law firm estimates that more than 100,000 construction workers now in nonunion affiliates could be forced i n to union membership by the.anti-double breasting-act 5) Davis-Bacon Act The 1931 Davis Bacon Act requires private contractors to pay prevailing wages to employees working on all federally funded construction projects with a value of over $2,000 Proposed a m endments to the Davis Bacon Act would expand its application to sub-contractors, suppliers of raw materials and components used on federal construction sites, and to all projects that are built privately but leased to the government. One version 10 Robcrt R. Nathan Associates, The Private and Public Sector Costs of Proposed Occupational Risk Legislation, 1988 11 Hazard Communication for Non-Manufacturing Employees, American Society for Personnel Administration LegaI Reprt, Spring 1988, p. 4 4 of this legis l ation was passed in the House as an amendment to the original Defense Authorization Bill, but was defeated in the House-Senate conference Economic Impact: Davis-Bacon Act requirements inflate the cost of federal construction projects by approximately 1 bi l lion annually No estimates have been made of the cost of expanding the law to subcontractors 6) Raising the Minimum Wage Several bills have been introduced to raise the minimum wage above its current level of 3.35 per hour. These bills would force employe r s to pay low-skilled workers higher-than-market wages. The version recently brought to the Senate floor would raise the current minimum wage by 40 cents an hour each year for three years, bringing it to $4.55 an hour. This bill died following a filibuster . It is likely to be introduced again in some form next year Economic Impact: The United States Chamber of Commerce es imates that raising the minimum wage would cost American business 4 billion per year& The Presidents Council of Economic Advisers calcula t ed last May that an increase in the minimum wage would cost consumers 13 billion per year in higher costs of products. There is wide disagreement over the extent of potential job losses because firms reacted to minimum wage hikes by laying off lower-skill e d workers. The Congressional Budget Office estimates that some 350,000 workers would lose their jobs, while Nathan Associates put job losses at as many as 800,000. l4 OVERALL ECONOMIC IMPACT OF MANDATED BENEFIT LAWS Table 1 summarizes the potential econom i c costs of the four most burdensome mandated benefit bills currently before Congress. If this entire catalog of legislation were to be passed, the total cost to consumers and businesses would range between $40 billion and 120 billion. As many as 2 million jobs could be lost as a result of the increased cost in hiring and retaining workers Ln addition to the overall price tag of the mandated benefit agenda, these laws impose other costs on society that proponents tend to overlook. Among them l2 Congressiona l Budget Office, Modifiing the Davis-Bacon Act: Implications for the Labor Market and the Fe&d Budget, 1983 13 U.S. Chamber of Commerce, Increasing the Federal Minimum Wage Rate, 1987 14 Robert R. Nathan Associates, The Impact of Increasing the Minimum Wag e on Employment in Retailing 1988 5 TABLE 1 THE OVERALL ECONOMIC IMPACT OF FOUR MANDATED BENEFIT LAWS ANNUAL LEGISLATION COST TO BUSINESSES/CONSUMERS JOBS LOST Mandated Health Insurance 30 100 Billion 1 Million Parental Leave 200 700 Million unknown Minimu m Wage $4 13 Billion 90,000 800,000 Occupational Disease Notification Testing 5.8 6.4 Billion unknown TOTAL COST Low Estimate $40 Billion 1.1 Million High Estimate $120 Billion over 1.8 Million Source: Nathan Associates Small and minority businesses are hu r t most Since 1980, Fortune 500 companies have shed 1.6 million workers from their payrolls while small businesses have added over 16 million employees. Yet mandated employee benefits legislation is primarily an assault on the job-creating small business s e ctor not big corporations. Most large, established firms already provide many of the benefits that would be mandated by law. For instance, the parental and medical leave legislation would affect almost only small businessesiJxcause an estimated 95 percent of all Fortune 500 companies already provide this benefit. The same is true of health insurance. More than 98 percent of businesses with over la0 workers ffer health coverage, while only 45 percent of firms insurance bill, Robert L. Crandall, President of American Airlines, Inc openly admits that one of his main objectives in supporting the bill is to saddle his smaller competitors with the same health insurance compensation costs that his own firm faces. l7 with fewer than ten employees do. 4 n fact, one v ocal proponent of the Kennedy health Small businesses suffer most from mandated benefit laws because the cost per worker of complying with such laws is higher for small firms than their larger competitors. According 15 Frances Shaine, Statement of the Cha m ber of Commerce of the United States on Parental and Medical Leave Act of 1987, Senate Committee on Labor and Human Resources, February 19,1987 16 Frank S. Swain, Small Business Administration, Letter to Senator George Mitchell, July 25,1988 17 Quoted in N otable and Quotable, The Wall Sfmet Joumd, August 8,1987, p. 16 6to the Small Business Administration, the administrative costs associated with a fringe benefit package tends to be greater for small businesses because they typically experience more rapid l abor turnover rates and hire more part-time and seasonal workers. In addition there are economies of scale in providing fringe benefits. Because of their smaller risk pool for instance small firms pay about 40 percent higher health insurance premiums than large businesses. lb Almost all the nations small business groups, including the half-million member National Federation of Independent Business (NFIB), strongly oppose the government mandating employee benefits. In fact, the 1986 White House Conference o n Small Business ranked opposition to mandated benefits as the number two priority of the small business community.

Minority small businesses in particular would be hard hit by mandated employee benefits legislation. Ralph C. Thomas, executive director of the National Association of Minority Contractors, complains that the Davis-Bacon Act is poison to minority contractors. The laws prevailing wages are often too high for the minority contractor to afford. The law also stifles the minority contractors effor t s to hire as many minority workers as possible. l9 Mandated benefits hurt, rather than help, American workers Most supporters of mandated benefits concede that laws such as the minimum wage do lead some low-skilled workers to lose their jobs. But these su pporters contend that the alleged benefits to the rest of the work force outweigh the cost to those whose jobs are eliminated. Yet almost all workers lose when the government mandates minimum benefits.

The reason is that when specific benefits are re uired by law, businesses respond by trying to reduce other aspects of their total labor bill. 90 The Congressional Budget Office acknowledges this. In its analysis of the mandated health insurance legislation, for instance, the CBO writes Employers would almos t certainly strive to minimize the impact [of the Kennedy Bill] on profits. Because raising prices would reduce sales of their products, affected employers would probably adopt this strategy only to the extent that they could not shift costs to their emplo y ees. The shift could be accomplished by limiting wage increases, by reducing fringe benefits of other types than health insurance, or by cutting the quantity of labor employed. Because most of the workers who would be affected receive little or no compens a tion in the form of fringe benefits, the long run effect would be to lower wages 18 Swain, op. cit 19 National Association of Minority Contractors Minority Contractors Support Davis-Bacon Reform, Press Release, August 15,1986 20 The best general discussio n of this is in Richard B. McKenzie, nte Amencun Job Machine (New York Universe Books, 1988 7 about the amount of the employers required contributions Minimum Wage Costs. Several studies on the impact of the minimum wage confirm that workers suffer through reductions in other forms of compensation. Ohio State economist Masanori Hashimota reported in the American Economic Review that after the 1967 increase in the minimum wage to $1.40 an hour, the take-home pay of workers rose by 32 cents an hour, but the v a lue of per-hour training for minimum wage workers fell 41 cents an hour. This means these workers lost 9 cents an hour Other studies find that minimum wage hikes lead to net overall losses in pay and fringe benefits, thanks to cutbacks in such benefits as severance pay, sick pay, year end bonuses and vacation time.23 When the government locks in minimum levels of benefits, workers also lose the flexibility to choose their fringe benefits. For instance, a 1986 survey of 700 firms by the National Chamber Fou n dation finds that 77 percent have formal or informal parental leave policies for their workers. Of the 23 percent that do not have such a policy, almost three-fourths said they do not offer parental leave because their employees have indicated they prefer r ed other benefits Thus, if the federal government compels these firms to provide parental leave at the expense of other fringe benefits, the workers would not be able to receive the package of benefits they preferred MANDATED BENEFITS AND U.S. INTERNATION A L COMPETITIVENESS The lesson of foreign countries that have introduced minimum employee benefit requirements is that this form of hidden taxation impedes job creation and deters businesses from locating within their borders The 1988 report of Ronald Reaga n s Council of Economic Advisers concludes that by enacting mandated benefit laws, many European nations have sacrificed a degree of international competitiveness. States the report European governments have realized that the inflexibility of labor markets d ue to job security mandates, along with a variety of other labor market interventions have impaired growth in the employment sector and spawned high unemployment rates.b Saddled with double-digit unemployment rates, the report adds, some West European cou n tries have even begun to repeal job protection and mandated benefit laws Over the past two decades U.S. businesses have enjoyed a distinct competitive edge over many of Americas major trading partners. The reason for this is that the U.S. economy is less burdened by labor market rigidities. This means that U.S. firms have been better able to adapt to changing economic conditions and thus to take advantage of new opportunities.

This advantage will be lost, say many economists, by mandating employee benefits and job 21 Grdch, op. cit p. 11 22 Masanori Hashimota, Minimum Wage Effect on Training on the Job, American Econoniic Review December 1982, pp. 1070-1087 23 Belton M. Fleisher, Minimum Wage Regulation in Retail Tmde (Washington, D.C Amencan Enterprise In s titute, 1981 24 Council of Economic Advisers, Economic Report of the President, 1988, pp. 1951 8 security provisions. The U.S. would be surrendering one of its most important advantages in international trade CONCLUSION American workers are the best paid e mployees in the world. The average manufacturing wage with benefits is approximately $13 per hour. In Japan the average manufacturing wage is only about half this. Despite the rhetoric of the lobby for mandated benefits, moreover American workers enjoy ge n erous fringe benefits from their employers. According to the U.S. Chamber of Commerce, almost 40 percent of labor compensation is in the form of benefit including health coverage, pension contributions, paid vacations, and maternity leave. 25 Someone Will Pay. The current movement in Congress to make businesses the social agents of the welfare state by mandating employee benefits bodes ill for American workers minorities, consumers, and businesses. If the international experience with such laws is any guid e , this back door taxation threatens to reverse the healthy trend in new job creation raise consumer prices, and torpedo recent gains in American competitiveness. As former director of the Congressional Budget Office and Brookings Institution economist Ali c e Rivlin, an advisor to liberal officials, ackn wled es: Shifting costs to business may sound like a free lunch, but someone will pay. 28g To ensure that the American worker will not have to pay for this, Reagan should declare his emphatic opposition to t h ese labor protection laws and veto any eleventh hour legislation that would mandate the loss of jobs Stephen Moore Grover M. Hermann Fellow in Federal Budgetary Affairs Dana Joel Research Assistant 25 Shaine, op. cir 26 Quoted in Stop Kidding Us, Fomne, A ugust IS, 1984, p. 33 9

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