The Healthcare-Competitiveness Fallacy
Be ready: This fallacy may well be rearing its ugly, and illogical, head in the days to come.
Some observers have asserted that domestic producers that provide health insurance to their workers face higher costs for compensation than competitors based in countries where insurance is not employment based and that fundamental changes to the health insurance system could reduce or eliminate that disadvantage. However, such a cost reduction is unlikely to occur, except in the short run.
The equilibrium level of overall compensation in the economy is determined by the supply of and the demand for labor. Fringe benefits (such as health insurance) are just part of that compensation. Consequently, the costs of fringe benefits are borne by workers largely in the form of lower cash wages than they would receive if no such benefits were provided by their employer.
Replacing employment-based health care with a government-run system could reduce employers’ payments for their workers’ insurance, but the amount that they would have to pay in overall compensation would remain essentially unchanged. Even though changes to the health care system could have various effects on the supply of labor, the underlying amount of labor supplied at any given level of compensation would hardly be
affected by a change in the health care system. As a result, cash wages and other forms of compensation would have to rise by roughly the amount of the reduction in health benefits for firms to be able to attract the same number and types of workers.
Compensation could take some time to adjust to its market-clearing level (the point at which supply and demand are equal). During that time, firms that formerly provided health benefits—especially firms that employ workers under multiyear contracts—could experience substantial reductions in labor costs, which would boost their profits temporarily. But those firms would experience no permanent change in their competitive status.