The Cost of Benefits

By requiring employers to provide parental leave, day care, or health insurance, government can look compassionate and fiscally responsible at the same time. But a recent working paper from the National Bureau of Economic Research shows that these goodies come at a cost.

MIT economist Jonathan Gruber looks at what happened in three states that passed laws, effective in 1976, requiring that basic health insurance include comprehensive coverage for maternity expenses. These laws forced businesses that offer health benefits to provide employees with maternity coverage. Gruber estimates that the mandate increased the cost of insuring women of child-bearing age by as much as 5 percent of their wages.

Analyzing data from the Current Population Survey, Gruber finds that real wages for married women of child-bearing age fell by 3.4 percent between 1974–75 and 1977–78 in the three states that required maternity coverage, while they rose by 2.8 percent in five control states. Taking into account different economic conditions, wages in the mandate states fell 5.4 percent relative to wages in the other states.

Gruber concludes that nearly all of the additional cost imposed by the insurance mandate was shifted to employees in the form of lower wages. At the same time, employment among married women of child-bearing age declined, while hours per worker increased (since the fixed costs of employing these women had risen).

If the market is allowed to adjust, Gruber argues, mandating group-specific employment benefits is more efficient than paying for them through general taxation because it means that the people who are likely to enjoy the benefit pick up the tab. Of course, many people in the affected group—in this case, women of child-bearing age—won't need the benefit. And the broader the benefit, the larger the group of people who will end up paying, through lower wages and lost job opportunities, for something they don't even want.