Unwilling to face the budgetary consequences of new social programs, Congress is now calling for a host of federally prescribed employment benefits that would impose hidden costs on employers, workers, and consumers. The proposed benefit mandates -- such as health insurance, parental leave, and advance notification of plant closings -- would amount to back-door taxes. These requirements would undermine the favorable effects of tax reform and would weaken growth in productivity, jobs and overall output.
Benefit mandates may be well intentioned, but, like many other government regulations designed to show compassion for workers, these, would miss their mark. Determining benefits by government fiat rather than by normal market processes would harm American workers by distorting compensation packages and by reducing opportunities for more jobs and higher pay.
Current law requires three types of benefits: Social Security, unemployment compensation, and workers' compensation. In addition, however, employee compensation typically includes, besides cash wages, a combination of such benefits as pension accruals, training, health insurance, vacations, sick leave, and advance notification of layoff.
In this country, wage and benefit packages historically have been determined in the market, and reflect the interplay of employers' cost considerations with the need to attract and retain qualified employees. Individual workers and unions make tradeoffs among cash wages, job security, better working conditions and a variety of other benefits. Because employers want to get the most out of the total compensation they offer, they have every incentive to offer the combination of wages and benefits that is most attractive to their employees.
Mandating additional worker benefits will raise the cost of labor and change the mix of compensation. There is no free lunch. The cost of providing a new benefit must be borne by someone -- employers, workers or consumers. The likely result will be a reduction in cash wages, existing benefits or jobs.
Prescribed benefits are inefficient because they are imposed arbitrarily, in a manner that fails to take account of either their worth to employees or their cost to employers. As a result, some firms may find labor too expensive and substitute capital for labor, so some workers will lose their jobs and others, in search of work, will fail to be hired. Many workers who keep their jobs also will be losers, because they will be giving up the cash wages and benefits they would prefer for the newly legislated ones.
In one recent initiative mandating benefits, employers would be required to provide health insurance coverage for employees working more than 17.5 hours per week. Employers would pay for 80 to 100 percent of premium cost. Preliminary estimates of increased health insurance costs to employers range from $25 billion to $100 billion during the first year.
Another proposed mandate would require employers to provide up to 18 weeks of leave in the event of a birth or adoption, or the illness of a parent or child, and up to 26 weeks for an employee's own serious illness. Returning employees would be guaranteed their previous job or the equivalent. Employers would have to choose between leaving positions unfilled and reassigning or hiring substitute workers. Required leave, even unpaid, would thus increase costs, particularly for smaller firms. The result would be fewer jobs, especially for women, since employers would expect women to be the predominant users of this leave.
The Senate, as part of the trade bill, has approved a requirement that employers provide 60 days' notice of a plant closing or a layoff of at least ne-third of the work force. Mandated notice would discourage new hires during expansions, leading to greater reliance on more costly overtime work. Mandated notice would increase the likelihood that a troubled firm would fail, since creditors and suppliers would tend to ask for stiffer terms after such announcements, and flexibility in responding to changing conditions would be reduced. Higher costs and greater risks in starting or expanding a business mean that there would be fewer new firms and fewer new jobs.
The United States has curbed inflation, successfully reduced many types of government intervention in the economy, and achieved tax reform. The result so far has been the creation of more than 13 million jobs in 55 months of economic expansion, as well as sharply reduced unemployment.
In contrast, employment in Western Europe, whose mandated benefits serve as models for U.S. proponents, has been flat since 1970. Unemployment rates in many European countries have increased since 1982, to levels well above earlier postwar peaks. Along with required participation in national health systems, parental-leave and advance-notice mandates are widespread in European countries, as are other job protection devices that favor those who already hold jobs at the expense of new workers.
It is ironic that benefit mandates are being proposed here just as many other countries are attempting to reverse such failed policies. At the May ministerial meeting of the Organization for Economic Cooperation and Development, officials from virtually all the industrial democracies agreed that a wider role for private incentives and improved functioning of labor markets are essential for sustained growth.
To ensure continued success and strong economic growth, we must resist the imposition of costly new government interventions. Mandated benefits would limit flexibility and stifle incentives. Creating new programs and entitlements under the guise of off-budget mandates would, like an on-budget tax increase, slow investment and job creation.
The writer is chairman of the President's Council of Economic Advisers.