national health care and american competitiveness

Greg Mankiw points toward a recent CBO report arguing that a national health care system would not improve American companies’ competitiveness. His case essentially rests on the following sentence in the report:

…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.

The upshot: national health care would turn out to be a zero sum game as far as competitiveness is concerned because employers would end up having to pay more to attract employees.

Mankiw focuses in on a very narrow definition of ‘competitiveness’: for him, it all seems to come down to labor costs.  The thing is, competitiveness can be defined in a few ways.  One is increasing the long term endogenous growth potential of the economy relative to other advanced economies. Another is increasing the productivity of American workers vis-à-vis others countries’ workers.  Mankiw is likely right that health care reform would not improve competitiveness if you restrict it only to mean labor costs.  But in either of the alternative senses, health care reform would plausibly contribute to American competitiveness.

As far as increasing the long term growth potential of the economy, one question is how a national health care system would affect different kinds of employers.  Two dimensions seem relevant:

First, a fairly small number of employers compete in the labor market based on the quality of the health care benefits they offer. Those employers might have to make up for what would be essentially a cut in compensation with cash (though, more likely, they would do what “high end” employers in Canada and Britain do which is offer supplemental health insurance which gives their employee access to private clinics).  As far as I can tell, these are the only kinds of employers who would be specifically subject to the effect Mankiw highlights in the quote above.

But the much bigger impact would be on the 15% of all employees who work for employers that offer no insurance at all as well as the sizable number of employees who work for employers that offer lower quality insurance than would be offered through a national system. As a recent GAO report makes clear, these employers are typically smaller and are concentrated in services:

While the share of large employers offering health benefits remained fairly constant between 2001 and 2006 at about 98 percent, the share of small employers (with 3-199 employees) offering them dropped from 68 percent to 60 percent.

So, a national system would likely impose a burden on many larger employers while improving the lot of smaller ones.  To the extent that one sees America’s competitive advantage as having to do with the relative ease with which this country produces small, entrepreneurial companies that might grow to become tomorrow’s Google or Microsoft, a national health care system should be a net positive.

A second dimension: impact among large companies is not equal either. Older industries and older companies with older workers are currently our least ‘competitive’. Think: legacy airlines.  Because the current system charges employers based on the risk pool of their employees, and also because the longer employees’ tenure, the better their benefits are likely to be, national health care would end up improving the competitiveness of some of our least competitive industries.

This is especially true of the auto industry. For reasons I detailed in a previous post, the auto industry took on retiree health care in the 1950s and, just based on demographics, the actuarial burden is getting worse with time. The most hard-nosed competitive markets advocates say that the shortsightedness of those contracts means the companies deserve to go down.  But that’s a normative policy judgment.  Empirically, there’s no question that relieving the auto companies (and now the union which technically owns retiree health care) would improve their competitiveness. If you buy into the idea that having a strong domestic auto industry is good for the economic prospects of the country (not to mention airlines and steel and myriad other older industries), then lightening their load would indeed improve competitiveness.

The second way of defining competitiveness has to do with the productivity of American workers generally.   The report seems to somewhat dismissively mention “labor market effects”. But these effects are non-trivial. Part of America’s competitiveness stems from the mobility of its workforce. Yet, lack of health insurance and prohibitions against preexisting conditions keep workers tied to employers and to place longer than they would otherwise be. Moreover, the lack of health care diminishes the productivity of those workers who lack insurance and that is a drag on overall competitiveness. Yet, it’s not entirely clear that offering “Cadillac” benefits to workers at the top end of the market improves their productivity. This gets to a last point which is the extremely high costs associated with the American health care system. If we are paying more bucks than we are getting back in terms of bang, it certainly ain’t improving productivity or competitiveness.  Why are costs so high?  It has least partly do with the screwy system by which health care is paid for: employees spend employers’ money so employers have little market power over providers to affect costs.

In the end, the CBO logic—at least as its cited by Mankiw—is too simplistic an assessment.  The narrow point about labor costs may (or may not) be true.  But its not the only—or the best—way to think about the issue.


Written by seansafford

May 27, 2009 at 5:05 pm

15 Responses

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  1. Nice.
    Conservative economists never met a wage increase that they liked, except perhaps their own.
    Also, as you point out, employer-provided health benefits have been eroding rapidly across the economy. Even your examples of extreme uncompetitiveness — legacy airlines — have been reducing benefits. Yet you don’t hear reports of a rush of talented workers to the companies that aren’t reducing benefits. As you point out, workers have a lot more firm-specific investments than we often assume. So it’s hard to see that CBO argument holding much water.


    von etc

    May 27, 2009 at 7:07 pm

  2. Alternatively, the report says nothing about toward a more market-oriented approach to healthcare. Right now, it is a highly regulated industry in which many of its competitive aspects are stifled by government intervention and it would be silly to argue that our current problems are a market failure.

    Add to that the plethora of public choice problems that come with political (a more realistic word than public) control of the entire healthcare system.

    If we really want to be open about it then we need to have more alternatives than the status quo and national healthcare (under the even more unrealistic assumptions put forth by its advocates).



    May 27, 2009 at 8:44 pm

  3. ” Because the current system charges employers based on the risk pool of their employees, and also because the longer employees’ tenure, the better their benefits are likely to be, national health care would end up improving the competitiveness of some of our least competitive industries.”

    This is an additional point above and beyond the question of whether healthcare+wages = employee compensation, but I think this line nicely outlines the difference in thinking.

    The divide seem to be a long run/short run debate.

    Conservative econ suggests that the risk takers should bear the costs associated with their enterprises and that the results will be good in the long run. Removing costs from time to time to increase the short run “competitiveness” of the “least competitive” can have very different effects on longer time scales. In these debates it is important to recognize how the terms function in the dominant frames of reference.



    May 27, 2009 at 9:08 pm

  4. Sean,

    I’m having a hard time following your argument. Is it that the current system’s subsidies distort the economy away from first-best and that universal coverage will remove that distortion? This is plausible, but I don’t see how the distortion harms smaller or more innovative firms. Under the current system, aren’t all firms (no matter their size) eligible for health care subsidy?

    Also, you say universal coverage has what economists call a growth effect… that it would increase growth rates. Empirically, do countries/states/polities with universal coverage see higher growth rates? My limited knowledge of the literature suggests not and the most sympathetical studies (I’m thinking if Peter Lindert’s Growing Public) just fails to reject the null that public expenditures have positive growth effects.

    BTW, you don’t have to compete on health care coverage for it to matter. If the first $9 of my $10 wage rate are in the form of fringe benefits and my potential employers “compete” on the money wages, those fringe benefits are still a part of my marginal calculations.



    May 28, 2009 at 5:07 am

  5. “If the first $9 of my $10 wage rate are in the form of fringe benefits and my potential employers “compete” on the money wages, those fringe benefits are still a part of my marginal calculations.” Yes. But if all employers were paying the $1 in money wages and then, suddenly, the government is providing the utility associated with that $1, then no one really has to pay it. I am not going to bolt my current employer unless I get a better deal somewhere else. I would only think of doing that in the following circumstance: my employer pays $2, most everyone else pays $1. But now, everyone is forced to pay nothing. My employer would have to give me the extra $1 somehow if she wants to keep me (assuming that I was there for that marginal dollar).

    As for whether subsidies distort the system from first best, I am saying that the current system puts downward pressure on the competitiveness of certain kinds of companies relative to similar companies in other countries. Small companies that don’t offer insurance operate at a deficit relative to small companies in other countries because they can’t attract the same quality of talent that large companies do. Large companies with huge legacy health care costs operate at a deficit relative to their direct competitors in other countries because of the way the health care system is structured. An economist might say this all comes out in the wash. I disagree.

    Finally, I’m not saying it would necessarily increase the growth rate. I used the phrase ‘growth potential’ — which I actually gave some thought to. I’m mostly interested in endogenous growth; “capturing” new industries and new technologies. In the end, I suppose that will lead to sustained higher growth rates as well, but its a bumpy ride.

    Whats maybe even more important is our growth rate relative to the growth rates of competitors. I don’t think we’ll grow nearly as fast as China will in the next decade. But we can and should grow strongly relative to other advanced industrialized countries. We need to do what we can to make sure that we continue to grow at a steady pace and reforming the health care system is necessary to making that happen.


    Sean Safford

    May 28, 2009 at 4:03 pm

  6. BTW, Mankiw is riffing on an essay by Krugman (and a book) called Pop Internationalism. Its really good on the competitiveness of countries.



    May 28, 2009 at 5:18 pm

  7. Mankiw suggests that getting the cost of healthcare off the backs of corporations won’t improve their competitiveness, because employees take the benefit of the healthcare provided into account in assessing their compensation, and by the rules of supply and demand corporations would have to increase their wages to make up for the health care benefit they no longer provide. This argument may make some abstract academic sense initially, but in fact both analytically and in the real world is close to absurd. First, to make the most obvious point, by Mankiw’s logic pay ought to be higher in companies that don’t offer health care. But it isn’t. There is even evidence that pay is lower – companies not in a position to offer health care to their workers are generally not in the best position to offer higher wages either. Second, if the health care is provided by, say, a government entity instead of corporations, an employee’s overall financial benefit will remain unchanged – it will simply be provided by two entities (the corporation and government) instead of the corporation alone. In such a situation there is ZERO evidence that corporations will have difficulty in attracting workers and will therefore have to increase wages. Third, it is probably true that some employees who are unhappy in their jobs stay in them longer because health care is provided, and may therefore leave once health care is more widely available. But these are hardly the majority of workers, and in any case retaining those employees will involve a host of incentives (like promotional opportunities), of which compensation is only a part, and perhaps the smallest part at that. Finally, the Mankiw explanation falls apart when the situation is examined globally. It is a fact that legacy American companies are today at a competitive disadvantage because they carry the cost of healthcare. If foreign companies without this burden haven’t had to increase their wages, it is hard to see why American companies will. Bottom line, even the basic premises of Mankiw’s argument don’t hold much water.



    May 29, 2009 at 1:16 am

  8. ““high end” employers in Canada and Britain…offer supplemental health insurance which gives their employee access to private clinics”

    I don’t think you understand the Canadian system. Employers often offer supplemental insurance to cover what’s not covered under Medicare (ambulance rides, for example.) Private health care expenditures accounted for 30-35% of total health spending in Canada – but this is not the same as expenditures in “private health clinics.” Most provinces have no private clinics.



    May 29, 2009 at 5:54 am

  9. @Mark. Point taken. Thanks. [I’d do better to switch it to France I think].


    Sean Safford

    May 29, 2009 at 11:55 am

  10. Sorry, but your example of older, less competitive industries just does not hold water. Using your case of legacy airlines, it is the industry structure (very high fixed capital costs, extremely low marginal costs, volatile input prices like fuel, etc) that cause that industry to perform so poorly over time. I am not an airline analyst, but I would bet the cost of a first-class ticket that healthcare costs are a very small percentage of their overall cost of operations.

    Because of that industry’s structure, any benefit received from displacement of healthcare costs would be competed away– probably immediately. They would continue being marginally profitable, serially bankrupt enterprises.

    In fact, this is the red herring behind a lot of the supposed “benefit” of nationalized healthcare. The companies that call the loudest tend to be in industries where competition is most fierce, fixed costs are high, and labor is strong. They earn little profit because of the industries in which they compete, and how those companies are managed– not because they have high healthcare costs. If a company has a heavily unionized workforce, and a new nationalized healthcare plan suddenly removes a lot of the burden of healthcare costs from that company, do you honestly think that workforce is going to stop fighting for better benefits? Do you beleive the workers will not be clamoring for a piece of the increased profitability?

    You are right– there are effects between industries that are significant and are ignored by the CBO and Mankiw. But call them what they really are– a subsidy from more profitable industries to cover the operating costs of less profitable industries.

    And don’t be suprised when, once some sort of national plan is put in place, those less profitable industries continue being less profitable.



    May 29, 2009 at 1:33 pm

  11. I take your point, but I also don’t think it undermines the point I am making. Yes, you are right, organized workers will clamor for what they see as their fair share of the profits (and my view is, if they have the power to demand it, then more power to ’em; that’s really the essence of capitalism). But I think I already conceded this… if I get you right, you are making Mankiw’s point: labor costs wouldn’t necessarily improve.

    And I’ll also concede that the logic I’m putting out there is tantamount to a subsidy from large, relatively new (and successful) industries to older ones. Guilty as charged. But thats kind of the point of a “tax”; it overcomes the collective action problem needed for the whole country to do better than would be the case otherwise. I see health care as not a whole lot different from good roads or education. I think instituting national health care would mean that the whole would do better than the parts acting individually.


    Sean Safford

    May 29, 2009 at 2:32 pm

  12. While I agree that you make a case for health care as a whole (society would be better off if everyone had access to effective, reasonably priced healthcare), in this case the cure is worse than the disease. A subsidy from a newer, successful, profitable company to an older, less successful company may not necessarily benefit society. Whereas everyone benefits from a road, not everyone benefits from the continued existence of GM. In fact, society can be collectively hurt when it supports unprofitable, poorly managed companies– through inefficient allocation of resources, stifling of innovation by entrenched interest groups, reduced economic growth, etc. Not to mention the increased role of government in determining who are the benefactors and who are the suppliers of largesse (see: Chrysler).

    There are many companies who have been around for as long as the car companies and longer than the airlines who are not facing their challenges (like some banks, drug companies, oil companies, food companies, etc). They are better companies because they operate in better industries and have been better managed. And often they do not not have a heavily unionized workforce.

    I do not have a problem with the idea of a union– workers are stakeholders and deserve to get whatever value they can bargain for out of a company. But when the value extraction becomes so excessive that the company ceases to be a going concern, and then that company turns around and blames the cost of healthcare for their demise, and politically powerful constituencies demand a subsidy for their company that they helped to run into the ground…

    Well, you can see where this ends up.



    May 29, 2009 at 5:01 pm

  13. I don’t understand the premise that it is the unions’ fault for the demise of an industry because they ask for “too much.” It is the fault of management for being poor negotiators and promising more than they could deliver. I hear many people faulting oil companies for the demise of the auto industry because the asked for “too much” money for their oil that did in the auto industry.

    That being said, overall, I agree with Maxwell that the government shouldn’t subsidize businesses that are failing, but I believe that health care is more like education as a public good. Although some people might choose not to use it, having an educated labor force benefits all by reducing inefficiencies in both employment and the basic life-skills (e.g. balancing a checkbook) necessary to eliminate inefficiencies that would otherwise be created by having a population that doesn’t have the education necessary.

    In the short-run, and at the corporate level, this would amount to a subsidy for corporations with high legacy costs, regardless of how much of a proportion of costs those are to total costs. But, in the long-run having a more efficient labor market that is not plagued by high, and debilitating, health-care costs is, to my view, a net gain for the country as a whole. In the real-world of political compromise, this means that the government bails out some failing corporations and therefore temporarily rewards bad behavior (why this is so much more disastrous talking about the automotive industry than the financial industry in the current debate is beyond me), but it is in the service of a longer-term benefit of an ultimately more public good of a healthier labor market.



    May 30, 2009 at 6:19 pm

  14. Your point about entrepreneurial companies deserves expansion. A critical factor in economic health, at least from the point of view of evolutionary economics, is the rate of new company formation. I believe, based on both anecdotal and statistical data, that many companies are not formed that otherwise would because the entrepreneurs cannot risk their health to the private insurance market.


    Bruce Hughes

    June 1, 2009 at 2:55 am

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