Making Labor Markets Work

Making Labor Markets Work

Jon Forman

Alfred P. Murrah Professor of Law

University of Oklahoma

Remarks

for

Government Regulation of the WorkPlace (Session 3C)

First Annual Colloquium on Current Scholarship in Labor & Employment Law

Marquette University Law School

Milwaukee, WI

October 27, 2006

This adaptation is from Making America Work (2006).

Copyright 2006 by the Urban Institute Press.

Please do not quote, cite, or distribute without permission.

1

Table of Contents

Make Health Care Work 1

Overview of the Employment-Based Health Care System 2

Problems with the Health Care System 4

Millions of Americans Lack Health Care Coverage 4

The Health Care System Distorts Individual Decisions about Work and Retirement 5

Modest Changes that Could Improve the Health Care System 6

Expand Coverage 6

Strengthen the Relationship between Work Effort and Benefits 7

Restructure Health Care Coverage Markets 8

More Comprehensive Proposals 9

A Universal Coverage/Universal Responsibility Approach 9

A Universal Coverage/Wage Subsidy Approach 11

Transition to Universal Health Care 11

Vigorously Enforce the Laws against Employment Discrimination 12

Vigorously Enforce the Existing Laws against Employment Discrimination 13

Toughen the Laws against Employment Discrimination 13

Reduce Incarceration Levels 14

Make Education and Training Work 18

Expand Opportunities for Preschool Education 19

Improve Primary and Secondary Education 19

Increase the Opportunities for Postsecondary Education 20

Raise the Minimum Wage 22

Modestly Raise the Minimum Wage and Index it for Inflation 22

What about Paying Living Wages? 24

Expand the Unemployment Insurance Program 26

Problems and Recommendations 27

Promote Unionization 30

Make Full Employment a Reality 32

Some Other Ideas for Improving Labor Markets 34

Regulate Executive Compensation 34

Reduce the Workweek to 35 Hours 35

Restrict Immigration 35

Promote Worker Safety 37

iii

MAKING LABOR MARKETS WORK[1]

Jonathan Barry Forman[2]

Improving the government’s regulation of labor markets can help encourage work effort and promote greater economic justice. Specifically, the government should make health care work; vigorously enforce the laws against employment discrimination; reduce incarceration levels; make education and training work; modestly raise the minimum wage and index it for inflation; expand the unemployment insurance program; promote unionization; and make full employment a reality.

Make Health Care Work

First, the government needs to make the health care system work. The structure of the American health care system significantly affects the work and retirement patterns of Americans. Most Americans are covered by a health insurance plan related to employment. In general, having health care tied to employment encourages individuals to enter and remain in the workforce.

On the other hand, working does not guarantee health care coverage. Employers are not required to provide health care coverage to their employees, yet people who work typically earn too much to be covered by Medicaid. Of the 45.8 million (15.7 percent of) Americans without health care coverage in 2004, 27.3 million were between 18 and 64 and worked during the year, and 21.1 million of them worked full time.

Overview of the Employment-Based Health Care System

In 2003, national health expenditures totaled $1,679.9 billion, about 15.3 percent of the gross domestic product. The per capita health care expenditure was $5,671. The United States currently spends about twice as much, per capita, on health care as other industrialized nations.

The principal coverage mechanisms are employment-based health insurance, Medicare, and Medicaid. In 2004, 174 million Americans (59.8 percent) were covered by employment-based private health insurance, and 26.9 million (9.3 percent) bought their own private insurance. Another 79.1 million (27.2 percent) had government health insurance (i.e., Medicare, Medicaid, or military health care), and 45.8 million (15.7 percent) had no coverage.

Most nonelderly Americans receive their health care coverage through employment-based coverage provided to workers and their families. In 2004, for example, 161.2 million nonelderly Americans (63.2 percent) received their health care coverage through an employment-based plan (table 1). Another 34.2 million (13.4 percent) were covered by Medicaid, and 6.2 million (2.5 percent) were covered by Medicare. All in all, some 210.4 million nonelderly Americans (82.2 percent) had health coverage in 2004, while 45.5 million (17.8 percent) had no coverage.

Table 1. Health Care Coverage of the Nonelderly, 2004

Source of coverage / Millions / Percentage /
Total population / 255.9 / 100.0
Employment-based coverage / 161.2 / 63.2
Individually purchased / 17.0 / 6.6
Public / 45.5 / 17.8
Medicare / 6.2 / 2.5
Medicaid / 34.2 / 13.4
Military health care / 8.1 / 3.2
No health insurance / 45.5 / 17.8

Source: Author’s computations from U.S. Census Bureau, Historical Health Insurance Tables (2005), table HI-2 (Health Insurance Coverage Status and Type of Coverage—All People by Age and Sex: 1987 to 2004).

Employment-based coverage peaked at 69.2 percent of the nonelderly population in 1987 and has declined in recent years. Coverage also varies dramatically depending on such factors as firm size, industry, and earnings. For example, while 78.1 percent of employees at large private firms (1,000 or more employees) had health care coverage from their employers in 2004, only 27.5 percent of workers at firms with 10 to 24 workers received health care coverage from their employers that year. Similarly, while 82.1 percent of workers with annual earnings of $50,000 or more had employment-based coverage in 2004, only 12.8 percent of workers earning less than $5,000 had employment-based coverage that year.

The tax advantages connected with employment-based health care plans are significant, and these advantages are one reason employment-based plans dominate the provision of health care to working-age Americans and their families. Workers generally must pay income tax on the compensation that they receive from an employer. To encourage employment-based health care coverage, however, employer contributions to health care plans are excluded from income.

Another reason that employment-based plans dominate the provision of health care to working-age Americans and their families is that federal law generally makes it extremely difficult for states to experiment with more universal systems for the provision of health care benefits. The Employee Retirement Income Security Act of 1974 (ERISA) preempts “any and all State laws insofar . . . as they relate to any employee benefit plan.” Although ERISA was largely intended to federalize pension law and had little to say about health care plans, this preemption rule enables employers to avoid state regulation by setting up “self-insured” plans. State governments can dictate how health insurance plans work, but they are prevented from telling self-insured employment-based plans what to do. The resulting inability of states to regulate all health care plans makes it difficult for the states to act as “laboratories of democracy” that could experiment with the whole range of approaches for expanding coverage.

Problems with the Health Care System

Millions of Americans Lack Health Care Coverage

Far and away the biggest problem with the American health care system has to do with coverage. In 2004, for example, while 245.3 million Americans (84.2 percent) had some type of health care coverage, 45.8 million (15.7 percent) were without coverage. Clusters of individuals that tend to lack coverage include employees of small business, workers who lose their jobs, workers who decline employer coverage, low-income parents, low-income childless adults, the near-elderly, young adults, children, and immigrants.

Of particular concern, many of those without insurance are workers. Of the 37.3 million uninsured Americans between 18 and 64 years old in 2004, 27.3 million worked during the year, and 21.1 million worked full time. Contingent and part-time workers are especially at risk. For example, in February 2005 only 18 percent of contingent workers were covered by health insurance from their employer, although 59 percent had insurance from some source.

The Health Care System Distorts Individual Decisions about Work and Retirement

Another problem with the American health care system is that it distorts individual decisions about work and retirement. In general, the employment-based health care system encourages individuals to enter and remain in the workforce. By working for employers that provide health care coverage, individuals who value health care coverage can share in the lower price for health care that comes with a group health plan and the extra savings that come from the associated tax benefits. On the other hand, providing health insurance through employers can distort the work and retirement decisions of employees.

For example, the current employment-based health care system also has an adverse impact on job mobility. Workers often find themselves locked into working for a particular employer to keep their health care coverage. The usual suggestion for reducing the problem of job lock is to make health care coverage more “portable,” and the COBRA health care continuation rules are, at least, a first step in that direction.

The current health care system also interferes with the transition from welfare to work. Welfare recipients and individuals with disabilities who enter or re-enter the workforce often face the loss of health benefits under Medicaid. This loss of health benefits can be a strong disincentive for working, at least on the books.

The availability—or unavailability—of health insurance after retirement also has a powerful effect on the timing of retirement. Workers who have retiree health coverage are likely to retire much earlier than those who do not. On the other hand, workers without retiree health benefits have an incentive to remain on their current job at least until they are eligible for Medicare.

Another problem with the health care system is that it costs employers more to provide health care coverage for older workers than for younger workers. In 2004, health care cost $1,519 for the average person age 25–34, $2,263 for those age 35–44, $2,695 for those age 45–54, $3,262 for those age 55–64, and $3,899 for those age 65 and older. The costs of life insurance coverage also increase as workers age, as do the costs associated with work injury and disability. Workers generally cost more to employ as they get older .

Theoretically, employers could pass those higher benefit costs on to their older workers, but few do. Instead, the typical employer charges all its workers the same health care premiums, regardless of age. In effect, younger workers cross-subsidize the health care benefits for older workers. All in all, the compensation of workers nearing the end of their careers can exceed their productivity, while the compensation of younger workers can lag behind. When that happens, employers will have an economic incentive to avoid hiring or retaining older workers, and younger workers will have an economic incentive to work elsewhere.

Modest Changes that Could Improve the Health Care System

Expand Coverage

While universal coverage should almost certainly be our ultimate goal, we might want to start with a more incremental approach that focuses on designing and expanding health care programs for particular groups of the uninsured. For example, the government might want to expand coverage for low-income working families.

One way to help low-income working families would be to expand the Medicaid and SCHIP programs to cover virtually all low-income children. The government might also expand Medicaid or develop other programs to ensure seamless coverage for individuals making the transition from welfare to work. Another approach would be to create a new earnings subsidy that would provide health care vouchers for low-income workers. Together, these kinds of programs could help ensure that virtually all low-income working families have adequate health care coverage.

Strengthen the Relationship between Work Effort and Benefits

While health care coverage costs more for older workers than for younger workers, under traditional employment-based health care plans, young and old workers both pay the same premiums. In short, benefits are not tied to productivity. That gives younger workers the incentive to find employment where compensation is tied to their productivity, and it gives employers the incentive to replace older workers with younger workers. These are perverse incentives.

Consequently, both society and individuals have an interest in strengthening the relationship between benefits and productivity. Pertinent here, one recent trend in employment-based health care coverage has been the emergence of “consumer-driven” health plans. Consumer-driven health care plans tend to shift the responsibility for the payment and selection of health care benefits from employers to employees. For example, an employer might provide each employee $300 a month for health care coverage and leave it to the employee to choose among various health plans to pay for coverage. Key here is the fact that individual employees might face different premiums based on such factors as their age, personal health risk, or geographic location.

It could make sense to move further in the direction of consumer-driven health care plans and other mechanisms that strengthen the relationship between employee productivity and benefits.

Restructure Health Care Coverage Markets

On the other hand, many observers believe that the solution to many of the labor market distortions that result from the current health care system is to remove the link between health care and employment. As a starting point, we might encourage community groups and nonprofit organizations to offer health care plans and give them the same tax and regulatory advantages that are now available only to employment-based plans. For example, President Bush recently called for the creation of “association health plans” for small businesses that would allow insurance to be more portable and purchased more easily across state lines.

We might also think about modifying ERISA so federal preemption no longer prevents state efforts to expand coverage. The state of Maryland recently flexed its muscles and enacted legislation that would require companies with at least 10,000 employees (i.e., Wal-Mart) to spend at least 8 percent of payroll on health care or give the difference to the state. In July 2006, however, a federal district court struck down that law, ruling that it was preempted by ERISA. Perhaps now there will be more interest in relaxing ERISA’s overly broad preemption rule so states can experiment with broader approaches for expanding coverage.

Government could also adopt rules to counter insurance industry policies that drive up premium costs in the individual and small-group market. In general, government can reduce such insurance industry risk segmentation practices by preventing it from occurring in the first place or by allowing it but offsetting its effects. Community rating is an example of the first approach. Under a community rating system, insurance companies are required to take all comers and charge them all the same rate. Alternatively, under the second approach, the government could allow wide variation in premiums based on risk but provide subsidies to help older and higher-risk individuals pay their higher premiums.