The mandated benefit mirage - effects of requiring employers to provide certain employee benefits

Business Horizons, May-June, 1993 by Richard B. McKenzie

Politicians often harbor the delusion that the policies they adopt more or less have the intended effect. This delusion is fully evident in the contemporary political tussles over proposed legislation that would require employers to provide their employees with a variety of fringe benefits. However, few policy commentators, either proponents or opponents of the proposed changes, realize that politicians do not have as much control over worker welfare as is commonly thought, and that the control they do have is fading with the globalization of economic activity. Indeed, as is argued here, government-required benefits will, if passed, make many of the targeted American workers worse off, and the negative effects of the requirements will likely grow with time. Before enacting such legislation, members of Congress should question whether they will be doing more harm than good.

THE POLITICAL SNARE AND DELUSION

Politicians generally accept as an article of faith that if they impose a tax, the burden will fall on people who are taxed. Likewise, if they grant program benefits, members of the group who are the object of political largess garner the benefits. If political leaders set a minimum wage, then that wage must be paid--a fact that causes many to believe that the targeted workers will necessarily get an income increase. Many politicians appear to worry very little over whether their adopted policies will have perverse effects, or will even make the targeted group worse off. Good intentions, supported by the power of government, imply good results----or so it is commonly assumed.

During the past two decades, Washington and state capitals have witnessed a parade of politicians who have sought to require American employers to provide workers with an assortment of fringe benefits that are viewed as highly desirable. In 1974, there were only 48 state mandates, most of which required insurers to cover a variety of medical problems ranging from chiropractic services to alcohol and drug abuse treatment. If employers provided group insurance, then they were forced, because of the insurance mandates, to buy the expanded coverage--regardless of how their employees valued the additions. In the late 1980s, there were close to 700 such mandates. These mandates had the unintended effect of driving up the cost of health insurance and pricing many employers and their workers out of the health insurance market. According to one study, as many as one in four Americans without health insurance did not have coverage because of the proliferation of state mandates.

Undisturbed by or unaware of these perverse effects, proponents of mandated benefits have continued their full-court press for additional requirements. The "mandated benefits" prominent on today's political agendas include extended benefits for unemployed workers and a requirement that employers grant their employees as many as 12 weeks of leave annually to care for a new baby or an ill family member. Under the Family and Medical Leave Act of 1993, the leave would be unpaid but group health coverage would be maintained, presumably with the employers' and employees' contributions continuing as if the workers were still on the job.

A number of politicians and interest groups back an impressive array of additional mandated benefits. The list includes group health insurance, unpaid (or paid) leave for "eider care" (or care of aging parents), child (and eider) day-care facilities at the employment site, extended plant-closing notices, termination pay, life insurance, minimum paid vacations, and extended sick leave. Other reform proponents would require that part-time workers be granted the benefits provided full-time workers. President Bill Clinton now wants to mandate that large employers provide their workers with retraining, at least up to 1.5 percent of their total wage bill.

Indeed, potential mandated benefits appear to have no limit. Some would go so far as to construct a sweeping "economic bill of rights" that would make an array of mandated benefits a part of the constitutional constraints on Congress. Still others would make companies the "social agents of the state," meaning government welfare offices would be supplanted by corporate-managed human resource offices. Such a shift in social responsibility from individuals to business and the state would effectively "privatize" the welfare state, making the welfare delivery system more humane and more efficient--or so it is argued.

For some political analysts in Washington and the state capitals, the need for the proposed mandates is self-evident: a matter of human dignity in a prosperous country. The founder of Parent Action, a family advocacy group, suggests that family leave has been made necessary by the "tensions" created by the emergence of so many households in which both parents work, which in turn has been partially responsible for the high and rising divorce, infant mortality, drug-use, and poverty rates:

The family as a nurturing environment for children seems to be disintegrating.. .. [W]e have found new evidence pointing to the importance of the first three months of a baby's life... The parents, too, need the time this leave provides. Postpartum depression in the new mother is sometimes regarded as mundane, but it is a serious and common reaction to labor, delivery, and the stresses of a new baby. (Brazelton 1991)