Code Red: Two Economists Examine the U.S. Healthcare System

February 12, 2015

Shame on Staples? No, Shame on You Mr. President. It’s Past Time to End the Employer Mandate

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 10:46 am

The New Year always brings many changes.  In addition to soon to be broken resolutions, this particular year ushered in strict mandates requiring employers with more than 100 full-time employees to either provide health insurance to those employees or pay fines of between $2000 and $3,000.  We’ve seen many firms publicly respond to this by cutting benefits to part-time workers.  Despite the criticism that often accompanies these decisions, in many, if not all, of these cases this move benefits employees. Without the offer of employer-provided insurance they get access to the ACA exchanges.

Part of the criticism stems from the implicit belief that firms “give” benefits to their employees out of some form of philanthropy.  These benefits are just a tax-preferred (though not really for low-income employees) form of compensation, and research shows that increases in benefit costs result in lower wages for employees.  The firms that have cut benefits will either increase wages or lose a lot of employees. (If they cut benefits, do not raise wages, and do not lose workers, then they must not have been profit maximizing to begin with; we highly doubt that firms like WalMart would have knowingly forsaken an opportunity to maximize profits.)

As the employer mandate has been phased in since the passage of the ACA, we have seen an increasing focus on the artificial distinction between full and part time employees.  Firms are only responsible for fines based on how many full-time employees don’t have access to insurance and a compilation of anecdotal evidence suggests that employers have responded by placing strict caps on the number of hours their employees can work.  Suggestive evidence of this being a widespread phenomenon can be seen in this analysis of CPS data, which shows an increase in the number of part-time hours working below 30 hours per week.  While there are many things that could be causing this shift, the timing strongly suggests that hand of the ACA employer mandate at work.

Most recently, news emerged that Staples has threatened to fire any part time employee that works more than 25 hours per week.  To be fair, Staples executives claim that this is simply a reiteration of a long-standing rule though the timing suggests that stricter enforcement of this regulation is likely related to the large fines that Staples would face for part-time employees that cross the artificial 30 hour barrier.  In a recent interview, President Obama was none too pleased about this announcement:

“I haven’t looked at Staples stock lately or what the compensation of the CEO is, but I suspect that they could well afford to treat their workers favorably and give them some basic financial security. It’s one thing when you’ve got a mom-and-pop store who can’t afford to provide paid sick leave or health insurance or minimum wage to workers — even though a large percentage of those small businesses do it because they know it’s the right thing to do. But when I hear large corporations that make billions of dollars in profits trying to blame our interest in providing health insurance as an excuse for cutting back workers’ wages, shame on them.”

Shame on you Mr. President. First, Staples is only doing this because of your policies.  And who can blame them for reacting like this. Staples isn’t earning “billions” in profits per year. They are competing in a world of online commerce where their competitors don’t have the same large retail workforce (though much of their business appears to be shifting out of the retail setting as they shutter hundreds of stores.) Finally, it should be noted that recent research finds that these larger employers are already offering higher wages than “mom and pop” stores.

These points aside, the President’s statement is either disingenuous or belies a willful ignorance of how and why private employers provide benefits to their employees. Benefits are not something that private firms owe to their employees, instead they are part of a compensation package that is determined in the marketplace.  These benefits are provided by employers because of the combination of a historical accident of post-WWII price controls, the tax-preferred status of these benefits, and the benefits of risk pooling in the employer setting in a world where people don’t have to purchase insurance.  Most economists believe that this employer sponsored insured (ESI) is inherently inefficient, and recent research by Garthwaite and his co-authors shows that is distorts the labor supply decisions of many Americans.

In this setting, what we are actually talking about is not just the provision of benefits but limits on how many hours employees can work because of a new explicit mandate in the ACA.  This is just further evidence that the employer mandate is causing far more harm in the labor market than good.

While we have been critical of many aspects of the ACA, one facet we clearly support is that it represents the first realistic opportunity to move away from the distortions of ESI.  By forcing people to purchase insurance and imposing an increasingly binding tax on “high dollar” benefits, the ACA limits the main benefits of ESI.  However, it then includes a counter-productive mandate that forces employers to offer benefits and distorts the number of hours that employees work.

Rather than lecturing CEOs that are acting in the fiduciary interest of their shareholders, the President should show the courage to end the employer mandate.  It will surely not be popular among many of his most liberal supporters, but it ultimately will make the ACA more effective.


  1. […] week we wrote that it was well past time to end the employer mandate in the Affordable Care Act.  In light of some commentary this week, we thought it best to revisit […]

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