Obama’s Free Lunch Fallacy: Paid Sick Days Aren’t Free
On Labor Day the Obama administration distributed a press release crowing about an Executive Order the president signed requiring federal contractors to provide paid sick leave. The president wants to expand this benefit to millions of American workers whose employee benefits do not include a dedicated number of paid sick days.
The President’s proposal would raise the cost of employing workers, potentially reducing their pay and job prospects. Economists have long known that mandatory benefits are not free. Academic research by White House health adviser Jonathan Gruber confirmed workers pay the cost of mandatory benefits through lower wages. Gruber also found the intended beneficiaries of mandated benefits may be less likely to be hired. In other words, requiring employers to provide paid sick days would hurt the employment prospects of workers most likely to stay home and care for a sick child: low-income, single mothers with small children.
Mandating sick pay is a bad idea. If employers are forced to allocate seven paid days off work for illness, they will find other ways to pay for it including adjusting future pay downward. For a worker making $15 per hour, seven days of paid sick leave is potentially worth $840 in additional gross pay. A recent survey of employers found the proportion of firms that provide dedicated sick days about equals firms providing paid days off that can be used for either illness or leisure. Thus, employers will likely cut back paid vacation days or paid holidays so that total days off does not increase.
A better option is to allow workers to decide how many sick days they need, and save for them in an account that can also be used for medical expenses. The president should have proposed expanding health savings accounts (HSAs) to help workers replace income lost due to illness. Making deposits throughout the year and then withdrawing funds from an HSA to replace income lost during unpaid sick leave is already legal under current law, but such withdrawals are taxed and penalized as “nonqualifying” expenses, subject to a stiff penalty. This should change; an exception to the nonqualifying medical expensed penalty should be made for illness. The advantage of using HSAs to fund sick days is its administrative simplicity: an employer could easily add a Sick Day benefit to an existing employee HSA plan.
Under current law, many workers do not qualify for an HSA through their job. Congress should expand HSA eligibility to all workers, and allow their use to fund a wide variety of medical needs. Because workers bear the cost of their fringe benefits, why not give them tools to manage the trade-off between wages and income lost to sick days? Allowing all workers to set aside funds in an HSA to replace income lost to sick days would allow them to reclaim those funds for nonmedical purposes when a sick day isn’t used, or to save for medical bills below their deductibles. Employers would also be free to add funds to the HSA if they choose. That’s a proposal the president should help Congress pass. It would be far better than the government forcing workers to stay home seven days throughout the year instead of taking an actual vacation or taking home more pay.
A longer version of this essay was posted on Town Hall.
Obviously mandating sick days is a bad idea, but I’m not sure how the HSA will help the situation either. Yes, Congress could extend eligibility to everyone, but that doesn’t mean that employers will actually offer the HSA benefit. I would imagine the set of workers who have HSAs but no paid sick time off is pretty small. I think allowing HSA funds to be used to compensate for sick time off is a great idea, but given that most employees who have access to HSAs probably also have paid sick leave, I don’t think it is actually a policy solution to the issue of workers not having paid sick time off (whatever form that my take).
According to the WSJ, HSAs contribute to the Cadillac Tax total. Wouldn’t any additional value added to an HSA exacerbate the problem?
That is a problem. The Cadillac tax threshold includes HSA funds deposited (but not even spent) in the calculation for the tax. Moreover, it includes both employer and employee funds. That is something that free-market policy people need to discuss. It’s definitely a step in the wrong direction.
When I worked for gummint contractors, I chose to work as a non-benefitted contract worker with no paid vacation, no paid sick leave and no health insurance. In return, I regularly earned between 50% and 100% more than the “captive” employees earned.
Advocating that employees support their sick days with their HSA is a ridiculous notion?
Work related stress cause many illnesses yet workers are to pay for the stress of working hard with their own money?
How about making them buy lunch at the worksite cafeteria. Oh, they do already.
Okay how about uniforms? They buy those too?
I guess you need to sell your soul at the company store.
Are these the freedoms our soldiers are fighting for?
If paid sick days are depressing the wages of federal workers, professors, oil field workers, union members, and knowledge workers at Microsoft, Google, et al, you sure could have fooled me.
These groups all have paid sick days and rising wages, and have for years.
Devon’s point seems to fail here because it does not factor in bargaining power. If workers have no such power, of course the employer will offset one benefit by cutting back somewhere else. When workers do have bargaining power, then employers give the new benefit and take nothing away.
I tend to agree up to a point. Unionized workers have collective bargaining power. I assume they are getting above market wages due to their coercive ability to restrict the labor supply. Public employees aren’t subject to market forces to the same extent private sector workers are. I assume they use lobbying to achieve higher than market wages, partially in the form of fringe benefits. Then their is those who have individual bargaining power. People like doctors, lawyers, engineers and other highly trained workers. They trade off part of their pay for paid sick days. Their employers likely also provides some of the days as a convenience, not wanting to have to retrain new people. It’s only anecdotal, but most of the highly trained professionals I know do their best to avoid calling in sick and often work form home on days when they are under the weather.
That said, I suspect you will have a hard time finding a labor economist who doesn’t agree that workers in general tend to pay for mandatory benefits in lieu of higher cash wages. That was Gruber’s findings.
I frankly am getting tired of hearing about HSA accounts, especially expanding them beyond paying for healthcare. All they do is erode the tax base which drives up marginal income tax rates. We should get rid of them along with the employer health insurance tax preference which exists because of an accident of World War II wage and price controls, and lower income tax rates, increase the standard deduction and expand the EITC to ensure that the change is revenue neutral. Somehow, we all manage to pay for life, disability, auto, homeowner, umbrella liability and long term care insurance with after tax dollars. Health insurance should be no different.
As for paid sick days, I saw a chart recently that quantified the number of low paid jobs in the U.S. which includes retail sales clerks, cashiers, janitors, housekeepers and maids, waiters and waitresses, cooks, other restaurant employees and a few others. The total came to a bit over 20 million workers. Adding benefits of any type raises costs that will have to be paid for somehow, most likely in the form of lower cash wages.
As for bargaining power, well paid blue collar workers in the auto, steel, coal, railroad and a few other industries all had bargaining power which they used to push up wages and benefits. A lot fewer workers are employed in all of those industries vs. 40-50 years ago, in part, because the high compensation costs spurred huge increases in productivity drastically reducing the number of workers needed per unit of output. Be careful what you wish for. Everything in life involves tradeoffs.
Last year I was speaking on a panel at an event and a very well respected academic came to me and asked me “why are you conservatives so fixated by deductibles and HSAs?” His point was that the real costs are above the deductible. He had a good point. HSAs are a first step to getting patients to think more about costs. But policy analysts need to figure out the next steps. For example, the other day John Graham commented about why reference pricing hasn’t taken off considering it worked well in the CalPERS experiment. That’s a good question. Going back a decade, every year the policy community claimed “next year” is the year medical tourism will take off. Every year, most medical tourists were uninsured immigrants returning home for care, or people crossing a border for cheap drugs or dentistry.
While speaking at a conference, I asked a guy from Humana why insurers willingly pay for a $1,500 MRI, or a $500 MRI without telling me, coercing me or giving me an incentive to use the $500 MRI. His answer was “patient preference.”
As John pointed out, there is some underlying reason health plans are passing up the low-hanging fruit. Not only do we need patients to have the appropriate incentives, we need insurers and providers to have good incentives too.
Devon – I certainly agree about the need for patients to have the right incentives.
One of the more frustrating aspects of healthcare economics to me is the lack of price transparency which patients must have to make informed choices about where to seek care. It’s also unfortunate that doctors historically did not view knowing or caring about costs as part of their job except maybe when the patient raised it as an issue for him or her. From what I hear, the interest group most opposed to price transparency is the hospitals. They insist on maintaining and sustaining confidentiality agreements between themselves and insurers regarding reimbursement rates. Even when states like Massachusetts pass laws to foster price transparency, the hospitals aren’t complying with them. Moreover, it’s often difficult or impossible to get an out-of-pocket cost quote for an upcoming procedure from a hospital that can be relied upon. How are patients supposed to make wise and informed choices in that environment?
I’m a big fan of reference pricing and I don’t know why it hasn’t gained more traction in the marketplace. The Humana executive’s comment about patient preference may have referred to a desire for and expectation of a wide provider network or the preference may be coming from the employer side or both. At any rate, once the deductible or out-of-pocket maximum amount is met, the patient has little incentive to care about costs after that. One drawback to reference pricing, I think, is that the number of procedures that lend themselves to the concept is comparatively limited. Imaging, lab tests, and elective surgeries come to mind but beyond that, there is lots of care that doesn’t lend itself to it. Even treatments for a similar type of cancer at a similar stage can differ from patient to patient based on what doctors think about which drug regimen will work best for that patient.
I like Devon’s idea.
The best policy is a free and robust labor market. Employers have an incentive to provide paid sick leave, higher wages, etc., when the competition (other employers) is attracting all the talented employees.
Brian, I am probably the least qualified person in town to lecture on Marxism, but Marx did invent the
concept of the reserve army of the unemployed. These are desperate workers, immigrant or domestic, who will take any job offered, at any pay, with or without benefits.
This has been the labor pool used by the kinds of businesses which offer no sick pay.
The use and existence of this pool tends to kind of blow up the concept of free labor markets.
I once had a self-described “liberal” professor, who taught the economics of development. He was one of the good liberal professors who understand economics and believed that incentives matter. He pointed out to me that some of the reasons the United States grew so prosperous — with a thriving middle-class — was that throughout most of our history we had a labor shortage. The country was rich in resources, but not enough labor to exploit it. That led to mechanization and the labor to run it was well paid.
Devon’s point illustrates the immense challenge facing America. We unfortunately have a very large surplus of unskilled and semi-skilled labor. Blame immigration, blame racism and the culture of poverty, blame stubborn males who slough off in schools…whatever the causes, America has a huge contingent of close-to-unemployable individuals.
Arnold Kling has some excellent writing about how we struggled through the 1930’s with this dilemma. The WPA for example deliberately used shovels and rakes instead of machines whenever possible, to let more persons be employed. The Second World War was hideous of course, but kind of a blessing in terms of sopping up idle labor.
When I read as I did today in the NY Times about Germany’s shortage of labor and how their new migrants might relieve their problem, it sounds like almost a different universe from America.
So the low-hanging fruit would be to ban leaf blowers in favor of brooms? I could live with that.
But Devon’s point about a chronic labor shortage is interesting. It may have been the real reason for the existence of a large middle class in the U.S. The same exists today in narrow fields such as engineering where non-managerial and even entry-level salaries are relatively high, and areas such as Silicon Valley enjoy a chronic boom economy.