More Unhealthy Economics

by Don Boudreaux on October 14, 2008

in Health, Myths and Fallacies, Reality Is Not Optional

Following up on this post, here’s a letter that I sent on Friday to the Washington Post:

According to E.J. Dionne, "Few investments would help businesses more
than offloading a share of their health-care costs to the government.
It’s social justice with an economic kick" ("Hoover vs. Roosevelt?"
October 10).  Overlooking the questionable "justice" of forcing Peter
to pay Paul’s insurance premiums, Mr. Dionne’s economics is wrong.

Government provision of universal health insurance won’t reduce employers’ costs
of employing workers.  Worker pay – wages and benefits – is set by
competition among employers for employees.  If competition obliges Acme
Inc. to pay a worker an hourly wage of $20 plus health benefits worth
$5 hourly, this fact means that Acme must pay this worker a
total-compensation package of $25 per hour.  Because government
provision of all health insurance would not reduce the value of this
worker to Acme and other potential employers, competition would oblige
Acme to raise the worker’s hourly wage by $5 – the amount that Acme no
longer must pay for health-insurance premiums.  Acme would still have
to pay this worker a total-compensation package worth $25 per hour. 

Contrary to Mr. Dionne’s assumption, government provision of universal health
insurance would not reduce firms’ costs — although it would surely
raise their taxes.

Sincerely,
Donald J. Boudreaux

I ignore in this letter the fact that employer-provided fringe benefits are untaxed, unlike wages.  I also make only passing mention that an inevitable consequence of government provision of universal health insurance is higher taxes.  These facts add wrinkles to the final equilibrium outcome (perhaps even big wrinkles), but they don’t change the fundamental point that if worker Jones will produce $26 per hour for Acme Inc. and would produce $25 per hour for Megacorp, then Acme Inc. must pay Jones at least $25 per hour to get Jones’s services; Acme Inc. must pay this sum regardless of how many goodies Jones gets from government.

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