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Sunday, April 25, 2004


Via Matthew Yglesias, I learn that Hillary Clinton thinks that Canada's National Health Insurance gives Canadian firms a "competitive advantage."

The United States' closest economic rivals have mandatory national health care systems rather than the voluntary employer-based model we have. Automakers in the United States and Canada pay taxes to help finance public health care. But in the United States, automakers also pay about $1,300 per midsize car produced for private employee health insurance. Automakers in Canada come out ahead, according to recent news reports, even after paying higher taxes.

At the same time, American companies are outsourcing jobs to countries where the price of labor does not include health coverage, which costs Americans jobs and puts pressure on employers who continue to cover their employees at home.
In other words, Hillary thinks that national health insurance will create jobs. This is an
argument we used to hear frequently, back when Clinton put government health care on the table. Now, there are lots of benefits to national health care, such as the fact the the government is more efficient at providing health insurance than private firms, but more jobs ain't one of the benefits.

The standard economic analysis of national health insurance, financed out of general taxation, is pretty simple. Since folks get the same health insurance whether or not they work, and since their income is taxed more heavily, they have less incentive to work. So for these two reasons, national health insurance costs jobs. A good (but very technical) discussion of the standard analysis can be found in health-economics-guru Jonathan Gruber's study of Canada's system [requires subscription].

So, that's the conclusion of the standard analysis, the conventional wisdom among academic economists everywhere. Below, I sketch out the argument in lotsa detail. Of course, to say that national health insurance will cost jobs, is not to say that it's a bad idea. We fund lots of programs that reduce work and cost jobs, such as Medicare and Social Security, which probably cause people to retire earlier.

The other important caveat is that standard economic analysis has to be pretty simplified in order to get clear conclusions. And the real world is a complicated place. One fact not included in the standard analysis is that national health insurance might make people healthier. Besides being nice for its own sake, a healthier country would be a more productive, and so there would be more hiring and more work. The basic economic model leaves lots of other stuff out too.

So it would be nice to know what has actually happened in countries that have implemented national health insurance. A casual glance at the data suggests that most countries with with national health insurance have higher unemployment rates than the U.S. A casual glance might not be that convincing, so tomorrow I'll discuss a careful study of Canada's experience, by a health economics guru.

Why National Health Insurance Costs Jobs: a Simple Economic Analysis.

What about Hillary's argument that national health insurance lowers the costs of hiring a worker? Won't that create jobs? Hillary's argument, I think, is just:

1. In the U.S., bosses currently pay their workers wages and provide health insurance.

2. With national health insurance, bosses would only have to pay wages.

3. Therefore, with national health insurance, bosses' hiring costs will be lower, and they will hire more.

Now, the fallacy here is the assumption that national health insurance has no effect on wages. In reality, workers and bosses bargain over wages and benefits. If health insurance costs go down, wages will rise to offset the increase. The short explanation for why is that with the fall in employment costs, bosses want to hire more workers, but (as I pointed out above), workers want to work less. For example there are some people whose primary motivation for working is to get health insurance, and they will drop out of the labor market after national health insurance is implemented. With more demand for labor, and less supply of labor, wages go up.

The idea that the cost of employer-supplied health insurance affects wages should be pretty familiar. In the U.S. today, when health insurance costs go up, wages fall (or rise less) to offset the increase (or equivalently, workers are required to pay a larger fraction of health costs). When health insurance costs fall, as bosses' costs fall to zero with national health insurance, the opposite will happen and wages will rise.

How do I know that wages will rise by at least enough to fully offset the cost of health insurance? Well suppose wages do rise exactly enough, can that situation last? For example, suppose that without national health insurance the wages for a particular job were $20,000/year + $3,000 in health insurance, and with government health care, wages rise to $23,000. Then the compensation offered for working would be the same both before and after national health insurance ($23,000). If that were all that happened, bosses would want to hire just as many workers as before, and just as many workers would want to work, so employment would be the same as without national health insurance.

But that isn't all that's going on. A compensation offer just as generous as before isn't worth as much as before. The reasons are exactly the same as those I initially gave for why national health insurance costs jobs. Because they get health insurance whether they work are not, some people won't be tempted by an offer that had previously motivated them to work. Also, because taxes have to rise to pay for the national health insurance, $23,000 isn't worth as much after taxes as it was before. So if wages rise to exactly offset the cost of health insurance, fewer people will want to work than before national health insurance was implemented. But at the same time, bosses will want to hire just as many people as before. So, this situation can't last and wages will have to rise some more.

So wages have to rise more than enough to cover the old cost of health insurance, and that means that bosses won't hire as many people. So national health insurance will cost jobs.

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