Mandated benefits
Here we want to define the idea of
mandated benefits and see what impact
this type of benefit has on the market.
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.
Impact of mandate on demand
W
Before mandate we
have Do and So which
results in Wo and Eo.
So
Wo
Wo - C
Do
D1
Eo
E
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.
Impact of mandate on demand
W
Wo
W1
Wo - C
E1
Eo
But, when the demand
falls to D1 with the
So
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.
Do
What is really
happening here is that
D1
with the mandate the
E
firm takes less labor
and pays a lower wage
on the labor it does
hire, but also has to
pay out the mandated benefit
Impact of mandate on Supply
W
The workers get value from
the mandated benefit.
So
Let’s say for each unit of
labor supplied that there is
S1
a benefit of B to the
W* + C
worker, but let’s also say B
Wo
is less than C (The amount
W* + B
W1
it cost the firm to provide
W*
the benefit).
Wo - C
Do
From the original
equilibrium we had
D1
demand shift down by C,
E
so supply will not increase
E1 E* Eo
by this much.
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.
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.