Mandated benefits

1. Mandated benefits Here we want to define the idea of mandated benefits and see what impact this type of benefit has on the market.

2. Mandated benefits Mandated benefits in the current context are benefits the government mandates must be provided by firms to their employees. We want to see how this type of mandate will affect the wage and the amount of labor traded in the market. I want to build the ideas step by step and we will start with labor market equilibrium and then show what happens on the demand side of the labor market with the mandate. We will assume the benefit costs the firm C dollars for each unit of labor the firm hires. In this sense the impact on the firm is the same as a constant payroll tax.

3. Impact of mandate on demand W Before mandate we have Do and So which results in Wo and Eo. The mandate costs the firms C per unit of E and thus the demand shifts left, or down by amount C. Eo is still the quantity demanded if it pays wage Wo – C and then gives benefit of C and pays in total Wo per unit of E. So Wo Wo - C Do D1 E Eo

4. Impact of mandate on demand W But, when the demand falls to D1 with the mandate the wage will actually fall to W1 and the labor traded (employed) will be E1. In total the firm will have cost per worker of W1 + C. What is really happening here is that with the mandate the firm takes less labor and pays a lower wage on the labor it does hire, but also has to So Wo W1 Wo - C Do D1 E Eo E1 pay out the mandated benefit

5. Impact of mandate on Supply W The workers get value from the mandated benefit. Let’s say for each unit of labor supplied that there is a benefit of B to the worker, but let’s also say B is less than C (The amount it cost the firm to provide the benefit). From the original equilibrium we had demand shift down by C, so supply will not increase by this much. So S1 W* + C Wo W* + B W1 W* Wo - C Do D1 E E* Eo E1 With the supply increasing the level of employment doesn’t fall to E1 – we get E* here - and the wage in the market is W*. The cost to the firm on each unit of labor hired is W* + C and the total compensation to each worker is W* + B.

6. Summary Mandated benefits have the same impact on the demand side of the labor market as payroll taxes. There is a deadweight loss. But, on the supplier side of the market there is also an impact due to the mandated benefit, the impact on the market is less. A major theme in politics for several decades has been the idea of health care and who should provide it. Mandated benefits provided by firms has been suggested. The analysis here provides the economic impact of such a policy. This analysis is one of many details that will likely be used in such discussions.