• Free Rider: Senate Finance’s No Good Very Bad Minimum Wage

    This week bloggers and policy wonks ripped into the free rider provision of the Senate Finance health reform bill. Ezra Klein called it “one of the worst policy ideas” he’d ever seen. Robert Greenstein listed it as one of the bill’s “two key problems.” Paul Krugman called it a “terrible idea.”

    The free rider provision is a variation of employer mandate in which employers either offer health insurance or pay the subsidies to which their low-income workers would be entitled for purchase of insurance on an exchange.

    There are some good reasons to dislike the free rider provision: it is administratively complex and it creates a disincentive for employers to hire workers from low-income families (for which the subsidies would be higher), among others. What the provision does not do is create an incentive to hire higher-wage workers in order to avoid the subsidy payments. That is, it will not lead to fewer low-wage jobs.

    To see why, it is relevant that the subsidy is not 100% of the wage, nor is it flat. It trends down with family income. Thus, by hiring a higher-wage employee a firm could avoid the subsidy but not at a lower cost. The increase in wage would be greater than avoided subsidy. Therefore, firms will not increase wages to avoid the subsidy. All other things equal, what the subsidy would do is encourage higher-productivity workers into the workforce because it raises the floor of total compensation (since wages can’t go below minimum wage). That’s just like a minimum wage.

    But, as others have pointed out, firms can avoid the subsidy by hiring (at the same low wage) workers from higher income families. That’s the new source of labor market distortion in the free rider provision that does not exist with the minimum wage.

    So, the free rider provision is like a minimum wage, only worse. It is a no good very bad minimum wage.

    Later: See my follow-up post on the free rider provision, in which I explain how it might work more clearly (or at least thoroughly and precisely) than most.

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    • Austin-
      A bit off topic, but are you clear on the plan to report the value of employer-provided health care costs on W-2 forms? Is the plan to make these costs part of taxable wages? Delete this comment if it’s too far off topic for this post.

    • I’m becoming more educated on the free rider provision and am now aware of some ways in which I didn’t understand it and ways, it appears, in which certain well-known bloggers and policy experts don’t understand it. I will come back and summarize those when I can. For now, just a few notes:

      The Chairman’s Mark that describes the Senate Finance bill is here:

      What it describes, as does Ezra Klein in his post to which I linked above, is an employer penalty that is the minimum of either ($400 x total workers) or the (state-average subsidy x subsidy eligible workers).

      A really careful reader might notice that this is actually inconsistent with what I wrote in my post above. In a future post I’ll sort things out.

      But also, Ezra and Greenstein both lament is that this penalty will provide a disincentive to hire workers who need family coverage, because family coverage costs more to subsidize.

      This doesn’t make sense to me. The penalty described above, and in the Chairman’s Mark, and by Ezra, does not go up if the worker needs family coverage. It does not discriminate. I don’t know where this idea is coming from. Anyone who makes this claim should be able to point to language in the Chairman’s Mark that supports it. I have not found any such thing (yet).