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Today’s Economist: Casey B. Mulligan: Small Companies and the Affordable Care Act

April 3, 2013 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Small businesses have spoken out against the Affordable Care Act, but medium-size businesses, customers and taxpayers may be the ones ultimately harmed.

Today’s Economist

Perspectives from expert contributors.

Beginning next year, the Affordable Care Act will penalize employers that fail to offer health insurance to their employees. Because small employers are especially unlikely to offer health insurance (see Table 3 in this paper from the Congressional Budget Office), and large businesses are likely to avoid the penalties because they already offer insurance, the penalties seem like an attack on small business.

But the Affordable Care Act simultaneously rewards employees at small companies by heavily subsidizing their purchases of health insurance on the exchanges created by the law. Because employees cannot take the subsidies with them if they switch to a large company offering health insurance, the subsidies are, in effect, subsidies to the small businesses themselves, helping them compete more cheaply in the market for employees.

Employees at the smallest companies, with fewer than 50 employees, are eligible to receive the subsidies, even though their employers are exempt from the penalties.

Indeed, some medium-size businesses that currently offer health insurance say they find the smaller company “penalty plus subsidy” combination attractive and plan to drop their health insurance plans in order to partake in it, too, even though their participation will entail a penalty.

The Affordable Care Act also created tax credits for small business that are already available. These credits perhaps have too many strings attached to be attractive to employers, because only 770,000 employees (in an economy with more than 130 million) worked for employers claiming the credit in 2010 (see Page 9 of this report from the Government Accountability Office). The Affordable Care Act also promised to provide small-business employees a choice of health plans, but implementation of that plan has been pushed back until 2015.

Many small businesses are not as good with bureaucracy and red tape as large businesses are – that’s one reason they did not offer health insurance in the first place. The employee subsidies coming online next year are pretty complicated, as evidenced by the 21-page application that must be completed by each employee, and the fact that any one year’s subsidy has to be estimated based on historical employee data, advanced from the Internal Revenue Service to the insurer, and then later reconciled when the employee’s family income for the year can be fully documented.

I suspect that large businesses will have human resource personnel dedicated to helping company employees complete the application and obtain and accurately reconcile the subsidy to which they are entitled. Employees at smaller business may have to fend for themselves.

We also have to remember that businesses compete for customers and for employees. A business that experiences a little direct harm from the act may benefit on the whole because competitors are harmed more. This is especially true because of the heavy penalty the law puts on businesses that expand from 49 to 50 employees: that one hire will cost the employer $40,000 annually in penalties, on top of that employee’s usual salary and benefits.

Thus, the type of company that may benefit the most from the law is not necessarily large or small but a company with small competitors that have been looking for opportunities to expand their market share, and in the process bring the number of their employees to more than 49.

Article source: http://economix.blogs.nytimes.com/2013/04/03/small-companies-and-the-affordable-care-act/?partner=rss&emc=rss

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Economic View: The Minimum Wage, Employment and Income Distribution

March 2, 2013 by Leave a Comment

I don’t believe that’s because economists care less about the plight of the poor — many economists are perfectly nice people who care deeply about poverty and income inequality. Rather, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.

First, what’s the argument for having a minimum wage at all? Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone — perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.

One argument for a minimum wage is that there sometimes isn’t enough competition among employers. In our nation’s history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment.

But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation’s largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers.

Instead, most arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. Though a desire to help the poor is largely a moral issue, economics can help us think about how successful a higher minimum wage would be at reducing poverty.

An important issue is who benefits. When the minimum wage rises, is income redistributed primarily to poor families, or do many families higher up the income ladder benefit as well?

It is true, as conservative commentators often point out, that some minimum-wage workers are middle-class teenagers or secondary earners in fairly well-off households. But the available data suggest that roughly half the workers likely to be affected by the $9-an-hour level proposed by the president are in families earning less than $40,000 a year. So while raising the minimum wage from the current $7.25 an hour may not be particularly well targeted as an anti-poverty proposal, it’s not badly targeted, either.

A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.

Some evidence suggests that employment doesn’t fall much because the higher minimum wage lowers labor turnover, which raises productivity and labor demand. But it’s possible that productivity also rises because the higher minimum attracts more efficient workers to the labor pool. If these new workers are typically more affluent — perhaps middle-income spouses or retirees — and end up taking some jobs held by poorer workers, a higher minimum could harm the truly disadvantaged.

Another reason that employment may not fall is that businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those prices — including some of the diners at McDonald’s and the shoppers at Walmart — have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help.

It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the current tax system already subsidizes work by the poor via an earned-income tax credit. A low-income family with earned income gets a payment from the government that supplements its wages. This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous.

By raising the reward for working, this tax credit also tends to increase the supply of labor. And that puts downward pressure on wages. As a result, some of the benefits go to businesses, as would be the case with any wage subsidy. Though this mutes some of the direct redistributive value of the program — particularly if there’s no constraining minimum wage — it also tends to increase employment. And a job may ultimately be the most valuable thing for a family struggling to escape poverty.

What about the macroeconomic argument that is sometimes made for raising the minimum wage? Poorer people typically spend a larger fraction of their income than more affluent people. So if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth.

All of this is true, but the effects would probably be small. The president’s proposal would raise annual income by $3,500 for a full-time minimum-wage worker. A recent analysis found that 13 million workers earn less than $9 an hour. If they were all working full time at the current minimum — and a majority are not — the income increase from the higher minimum wage would be only about $50 billion. Even assuming that all of that higher income was redistributed from the wealthiest families, the difference in spending behavior between low-income and high-income consumers is likely to translate into only about an additional $10 billion to $20 billion in consumer purchases. That’s not much in a $15 trillion economy.

SO where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small.

But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go?

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Article source: http://www.nytimes.com/2013/03/03/business/the-minimum-wage-employment-and-income-distribution.html?partner=rss&emc=rss

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Today’s Economist: Casey B. Mulligan: Why 49 Is a Magic Number

January 2, 2013 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The aggregate amount of regulation is difficult to quantify, but we learn something about it from the number of businesses that choose to have exactly 49 employees.

Today’s Economist

Perspectives from expert contributors.

I noted last week that government regulations are not as easily quantified as taxes and spending, because regulation has no budget and no obvious accounting method. Some laws are not enforced, while others have little impact because people would follow them even without the force of a law. The most useful regulatory budget would put a lot of weight on the laws that actually matter.

The economists Luis Garicano, Claire Lelarge and John Van Reenen are developing a method to quantify the aggregate importance of employer regulations. They note that small employers are naturally more common than medium-size employers, which are themselves more common than large employers.

Moreover, the frequency of employers of various sizes appears in many situations to follow a “power law” of statistics. If you tell these economists how many employers in a given region have, say, 22 employees, the authors can, with the power law, accurately predict the number of employers with 23 employees.

The chart below, reproduced from their paper using data on employers in France, shows the number of employers of various sizes. For example, about 10,000 employers in their sample have four employees. Their paper confirms the statistical power law with one glaring deviation: the exceptional number of employers with exactly 49 employees and far fewer with 50 employees (another lesser deviation occurs on the margin between 9 and 10 employees).

Luis Garicano, Claire Lelarge and John Van Reenen, “Firm Size Distortions and the Productivity Distribution: Evidence From France.”

The chart shows a couple of odd patterns at the 50-employee mark. First, there are sharply fewer employees (by more than a factor of two) with exactly 50 employees than with exactly 49 employees. Second, although the number of companies usually falls with the number of employees, there are actually more employers with 49 employees than with 45 employees.

The authors show how this pattern reflects deliberate efforts by employers to stay below the 50-employee threshold where several employment and accounting regulations take effect. For example, they note that French companies employing 50 or more workers are, among other things, obligated “to establish a committee on health, safety and working conditions and train its members,” whereas companies with 49 employees are not. France also has regulations kicking in at employment levels of 10, 11, 20 and 25.

Presumably, companies would not adjust their size to avoid regulations that are not enforced or regulations that require an employer to take actions that he already takes. Moreover, mandates that create costs for employers but create nearly equal benefits for employees should not induce companies to change their size, because (barring minimum-wage regulations) employers can pass on the costs of those regulations to their employees in the form of lower cash wages.

The primary reason for size adjustments is regulations that impose costs on an employer significantly higher than the benefits they create for the employees. The larger the net costs, the more company size should deviate from the statistical power law, which is why Professors Garicano, Lelarge and Van Reenen can use their power-law analysis to quantify the private costs of the regulations that kick in at the 50-employee threshold.

This is not to say that the regulations imposed on 50-employee companies are necessarily excessive, because they can create public benefits that more than justify their net costs for an employer and his employees, just as taxes and government spending can. For example, an air-pollution regulation might kick in at 50 employees that creates a significant cost for the employer and little aggregate benefit for his employees but creates a significant benefit for the people of France.

The authors show how, so far, employer sizes in the United States deviate less from the statistical power law, which implies that French regulations kicking in at 50 are more costly (from the point of view of an employer and his employees) than the United States regulations kicking in at that threshold.

But the United States has added some major regulations with its Affordable Care Act and its Dodd-Frank regulations. Beginning this time next year, for example, the Affordable Care Act will put new requirements on businesses with 50 or more full-time employees, whereas businesses with 49 or fewer employees will be exempt. Businesses with fewer than 26 employees may already be eligible for Affordable Care Act tax credits for providing health insurance, whereas larger businesses are not.

Perhaps we should thank the French for their heavy regulation, as it is already helping us account for the impact of regulation in the United States.

Article source: http://economix.blogs.nytimes.com/2013/01/02/why-49-is-a-magic-number/?partner=rss&emc=rss

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Economix: The Debt and Redistribution

May 5, 2011 by Leave a Comment

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in November and December 2010) toward “we must immediately cut the budget deficit.” The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt — and any further significant increase is likely to ruin us all.

This way of framing the debate is misleading — and at odds with the fiscal history of the United States. It masks the deeper and important issues here, which are more about distribution, in particular how much relatively wealthy Americans are willing to transfer to relatively poor Americans.

To think about the current size of our debt, start at the beginning of the American republic. (For a very short history of United States government debt, listen to my conversation last weekend with Guy Raz of National Public Radio; we cover more than 200 years in about three minutes. For more detail, look up the annual debt numbers at Treasury Direct).

On the first day of 1791, the recently founded United States Treasury had nearly $75.5 million in outstanding debt. This was roughly around 40 percent of gross domestic product, a large amount of debt relative to the size of the economy — but not out of proportion to what we have become accustomed to in recent decades.

However, relative to federal revenues, the debt was enormous — about 20 times the amount that the government was then capable of taking in. In contrast, the total Treasury debt outstanding since 1950 has fluctuated between 30 and 90 percent of G.D.P., with the debt-revenue ratio never worse than 5 to 1 — and in recent decades between 2 to 1 and 3 to 1.

The debt-revenue ratio matters, as it is relevant to whether the country can readily service the debt. Very few countries default because they can’t afford to pay their debts, either to their own citizens or to foreigners. Defaults occur when the political process in a country determines that, for whatever reason, the government cannot raise sufficient revenue.

At the beginning of the American republic, this was the central fiscal fight – primarily whether Alexander Hamilton would succeed in imposing a tariff on imports as a way for the federal government to raise revenue and thus, among other things, create a way to “fund” the debt (meaning cover the interest and, over time, pay down the principal). The tariff revenue fight was nasty and drawn out, pitting North against South in a way that would generate resentment and friction throughout the 19th century.

After losing repeated votes in the House of Representatives, Hamilton eventually prevailed – part of a larger deal with Thomas Jefferson and James Madison that was very much about who would pay what amount to create and sustain the new federal government. That debate was also focused on the kind of federal role the political elite wanted to achieve.

Once this political deal was done, United States government obligations moved quickly from widely reviled status to being perceived as relatively safe. Fiscal mood swings go both ways.

The main difference between the debate then and now is with regard to spending. In the early 1790s — and again after the Civil War, World War I and World War II — the spending surge had already taken place and the issue was how to move the government into surplus and bring down the debt.

Previous fiscal debates in the United States have therefore very much been about the distribution of the tax burden within a pro-growth system, and this again needs to be atop our political agenda – that was one reason I opposed extending the Bush-era tax cuts. In addition to this traditional issue, we are now confronting more directly than ever the question of redistribution that takes place through government spending.

In “Growing Public: Social Spending and Economic Growth Since the 18th Century” (Cambridge University Press, 2004), Peter Lindert traced changes in attitudes and actions toward redistribution in the United States and other countries. The pendulum of opinion has swung many times, and the United States has followed a somewhat different path than other relatively rich countries.

Now we find ourselves again about to debate the fundamental Hamiltonian questions: At the federal level, who will pay how much, to whom and for what, exactly?

Most of our government spending, now as always, goes to wars and transfers to relatively poor people and to older people. The military spending will come down — if we can end the wars (as we did in the past). The social transfers were constructed in a more open-ended fashion — and our long-term budget forecasts account for this form of future spending in a more transparent and more honest way than we do for the probability of future wars or financial crises.

The real budget debate is not about a few billion here or there – for example, in the context of when the government’s debt ceiling will be raised. And it is not particularly about the last decade’s jump in government debt level. Although this has grabbed the headlines, it is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay, and on what basis, in the form of transfers to relatively poor people — and how rising health-care costs should affect those transfers.

The consensus for Hamilton, Jefferson, Madison and their contemporaries was simple: No significant social spending was administered by the federal government. Professor Lindert estimates that social spending (including on “poor relief” and public education) in the United States even by 1850 was less than five-tenths of 1 percent of G.D.P.

We’ve come a long way since 1792, but the question is how far, exactly. What we should do is figure out the transfers we want to make and then agree on how to pay for them. But are we now willing to debate the real issues: taxes, health care costs and what kind of redistribution we think is fair and sustainable?

Article source: http://feeds.nytimes.com/click.phdo?i=992f5897ea1f31456a489f3c2e6eb1b9

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